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What they mean
Venture debt is a lesser known vehicle for raising funds. It’s basically debt but available for startups. It’s only available around series-a when you have been generating revenue that the venture debt funds will look at you though.
VD has a lower cost of capital than VC money. It ranks near the top of your capital structure, so if shit happens and you have something to sell, then this debt will be the first to be paid back. They will charge you a high investment rate at say 12-15% (depending) and then warrants of about the same amount. You should talk to multiple VD companies like you would go to banks applying for a mortgage.
The truth is the main criteria for VDs to invest is the quality of the investor who is leading your round. Venture debt investors do not want to lose money, so the theory is if you have a great investor they will not let you die (which is not entirely true).
If you are a seed stage company then this is a pretty stupid question. If you are at series B and you have not mentioned that you are raising venture debt then it’s a great learning opportunity. It could also imply that the investor is starting to think about how to put the round together and that’s a positive sign.
It is debt though. You need to pay it back. One of the big benefits is that you can increase your total raise by around 25% and take less dilution
What you need to say
“I’m sorry I don’t know that much about venture debt. I can remember reading about someone getting some in Pando, but I didn’t really pay attention. I presume it is like debt but for start ups? We are open to anything that would optimize our capital structure. If you lead, it would be fab if we could discuss it and if you could perhaps make some intros to guys like SVB and Kreos?”
“Yes, we are talking to three firms already. They’re waiting for a term sheet before they proceed to DD as usual. They have offered a soft term sheet for 20% of the round on top”
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