For emerging technology companies, gaining access to financial resources is a key challenge. Traditional bank loans are often unavailable, and the financial means of the founders are usually limited. An equity financing by institutional venture capital investors (“VCs”) often represents the most expensive form of capital. In addition to a VC-led equity financing granting outside investors preferential rights, it also dilutes the founders’ economic interest in the company and to some extent, shifts control over the start-up to the investors.
Venture debt (or “venture loans”) in contrast can offer cheaper money without the dilutive effect of another equity financing round.
In a nutshell, Venture Loans are mid-term financial debt instruments targeted towards the specific needs of young high-growth technology companies which have already secured (previously or at least simultaneously) the backing of institutional VC investors. Venture loans are usually amortizing (although they are sometimes structured with bullet repayments) and frequently feature interest-only periods of anywhere from six months to eighteen months.