08 February 2023

Venture Debt vs Venture Capital

• Understanding the differences between venture capital (ie equity) and venture debt and how to leverage both is critical for any start up or tech company.

• Venture Capital managers are setting up alternative investment funds in Luxembourg to fund or lend money to such company which can be used as funding for acquisitions or capital expenses or a bridge to the next round of equity.

• A loan is the beginning of a relationship; a partnership-focused lender will value flexibility and playing a long-term game with your company and investors.

Start ups raise institutional venture capital to build and grow their business, and they consider worthwhile to use venture debt to complement the equity they raised.

Venture debt is a type of loan offered by banks and nonbank lenders like Alternative Investment Fund that is designed specifically for early-stage, high-growth companies with venture capital backing.

The vast majority of venture-backed companies raise venture debt at some point in their lives from specialized lenders.

Venture debt “follows the equity”; it doesn’t replace it.

Raising debt for an early-stage company is more efficient when it can show the performance associated with the last round of equity raise, the intended timing and strategy for raising the next round, and how the loan will support or supplement those plans.

The amount of venture debt available is adjusted to the amount of equity the company has raised in the past, with loan sizes varying between 25% to 35% of the amount raised in the most recent equity round.

Early-stage loans to pre-revenue companies are much smaller than loans available to later-stage companies in expansion mode.

And companies without VC investors face significant difficulties in attracting any venture debt.

Fund Managers are setting up Alternative Investment Fund like debt fund or direct lending funds which are now investing in Venture debts.

Securitisation vehicles may also be used to issue a notes linked with a debt, a loan or a portfolio of Venture loans granted to such startup companies.

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Alternative investment fund

Securitisation of receivables