Alternatives to Equity: Venture Debt

Raising an equity round is not the only solution to funding a startup. Back in 2014, when we raised LegalVision’s first round of external finance, we didn’t raise an equity round, but rather a venture debt round, using a structure known as a revenue loan. Since we raised our first round three years ago, venture debt has become increasingly popular, as Partners for Growth’s Australian launch in 2016 demonstrates.

Case Study: Karthi Sepulohniam, Director at Partners for Growth Australia

Partners for Growth (PFG) provides custom debt solutions to private and public technology and life science companies as well as non-tech companies. We focus on revenue-stage companies – above $5 million in sales – and with a growth story. We seek to fund good companies who generally can’t get finance from traditional lenders.

In January 2016, PFG provided a venture debt facility to fintech innovator Nimble Australia. Nimble provides small loans via their purpose-built tech platform. They promise paperless applications where customers are approved and paid quickly. Nimble required $20 million to fund their loan book and for general working capital.

Nimble was still early in its growth cycle, so bank debt was not a viable option. Banks prefer funding profitable, asset-rich businesses. Most young tech companies are not profitable and have few assets. Further, banks often require personal guarantees to support even a small facility. By contrast, PFG was willing to take a general security over the business’ assets without any personal or director guarantees.

Combining Debt and Equity

Equity can be great to fund early commercialisation of a tech startup. But as your company progresses, a combination of debt and equity can work in concert to provide an optimum mix of capital from a cost and flexibility perspective. It didn’t make sense for Nimble to use equity to fund its loan book. This would have diluted their shareholding, which wasn’t necessary for circumstances where they had a proven offering, customers and growing revenue.

PFG structured the Nimble facility as a three-year loan with a two-year extension. Nimble pays interest on the loan commensurate with a venture debt facility (10%-13% per year). The deal includes customary financial reporting (no more than what the company provides to its board) and terms and conditions that are typical for secured lenders.

By accessing debt finance at an early stage, Nimble could raise funds without diluting the equity pool and without the need to give personal guarantees. Further, while PFG doesn’t take board seats, we were able to introduce Nimble to a number of senior C-level financial executives to the company’s management team for advice and mentorship.

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