Growth & venture debt
Speakers
Struan Penwarden (Partner, International Head of Venture Capital at Bird & Bird); Ross Ahlgren (Managing Director at BlackRock); Mark Rundall (Partner, Venture Capital at Bird & Bird)
The top three questions or themes explored in this session were…
- Venture debt vs high-street bank loan- what’s the difference? Both are senior term loans secured against company assets; however Venture Debt differs in that Venture Debt Providers (“VDP”) are highly attuned to the specific needs of high-growth companies. It was discussed that Venture debt is useful for expansion, e.g. funding an acquisition, or meeting demand in a market that a company has unexpectedly found traction in. It provides non-dilutive funding, often on bespoke terms.
- Some companies are well-suited for venture debt (and some aren’t). Companies which have a key asset against which to secure the loan (e.g. those operating in B2B SaaS, life sciences and deep tech sectors) are often well suited for venture debt. They have valuable, proprietary assets to secure against, and recurring revenue. However, businesses that are asset-light and generate low profit margins are often not best suited to taking on venture debt.
- Interplay between VDP and equity investors. The session touched on how venture debt compliments (and does not replace) equity investment. VDPs and equity investors are typically well acquainted in the market. VDPs rely on venture capital backing as a form of validation and a criterion for assessing a loan.
- Default on debt payments. When a company defaults, rather than immediately seeking enforcement, VDPs tend to take a more collaborative approach. We discussed how the VDP will work with the company to see if there is any way to relieve the issue without taking enforcement action, such as (i) reduce its operating costs, (ii) approach new or existing investors to raise further equity funding, and/or (iii) restructure the debt demands on the company (e.g. switch to interest-only payments for a short period or extend the repayment term). The last thing a reputable VDP wants to do is call in an event of default.
- A case for venture debt. We highlighted that venture debt does not require a company valuation and noted that there are typically no financial covenants (although these can be seen on larger loan transactions for later stage companies), no use-of-funds restrictions, and a VDP will not take a board seat (although they might take an observer seat). Best of all, venture debt is non-dilutive for existing shareholders, which is especially valuable for founders.
Top 3 things that attendees should take away from the breakout:
- Seniority. Most VDPs will not offer subordinated debt, so a company with multiple layers of existing debt may not be well suited.
- Distressed debt. We discussed that VDPs do not “loan to own”. If a company defaults on payment, the VDP will typically not look to sell the debt to a third-party distressed fund.
- Warrant coverage. Also known as a “yield enhancement” or an “equity kicker”. We discussed that a VDP will as part of the loan terms, typically require a right to subscribe for shares in the company (known as a “warrant”). The “value” of the warrant at the time it is issued to the VDP is often based on a percentage of the loan amount (e.g. if the loan is for £1m, the VDP may wish to take a 10% warrant (but this percentage varies on a deal by deal basis), meaning it will have the right (but not the obligation) to purchase up to £100k worth of shares at a price per share based on the valuation of the company as at the date of the warrant. The warrant typically represents a very small percentage of the cap table and aligns interests between VDP, founders/management and equity investors, and is a key reason for a VDP taking a longer-term view on helping the company achieve a successful exit.
If you want to learn more about this topic, here are some additional resources:
- BlackRock/Kreos Capital (venture debt provider) - https://www.kreoscapital.com/