Ask the Experts: Venture Debt Post-SVB
Recently, PartsTech CFO and Mostly Metrics author CJ Gustafson led a conversation with Mercury's VP of Finance Daniel Kang and Vareto President and Co-Founder Lalit Singh about the outlook for venture debt following the collapse and resurrection of Silicon Valley Bank.
- Does venture debt vary by stage? Venture debt is generally for early-stage companies, and not as tied to revenue metrics. For later-stage companies, this type of funding is typically known as a line of credit, which is tied to revenue milestones.
- Do you secure venture debt before or after a funding round? It depends. Generally it's better to set venture debt up when you don’t need it, rather than to have to rush to set it up when you do. The process could take 2-5 months from start to finish, often with legal review and negotiation taking the bulk of time.
- Best practices for finding a partner: When looking for a partner, start with a good slate of partners that you want to work with (banking institutions, non-banking institutions, and alternative options like neo-banks) and share the same set of standard documents with them that explain your business, operating plan, and market.
- Questions to ask your potential partner: When looking for a potential partner, don’t hesitate to ask what type of partners they will be when things go south, or when things are going up and you need to re-up your venture debt. Do they understand how your business generates revenue? Then compare and contrast the warrants, terms, and total costs before and towards the end.
- What’s in your treasury stack? It depends on your business. To manage your cash, diversify where you bank and implement cash sweep accounts. For example, you can have two bank accounts (one that supports your day-to-day business, and then a second partner where you could set aside a few months of operating expenses).
- Think twice about when and why you need venture debt. Lalit shared a piece of advice from Snyk's founder Guy Podjarny: "Venture debt makes great things better, and it makes bad things worse."
- Contextualize where you are as a business and what your plans are moving forward. Take a more fundamental view and review your cash flow and forecast so that you can understand what type of capital actually makes sense.