Debt Financing as a VC-Backed Benefit
July 29, 2010 1 Comment
One benefit of venture capital financing that isn’t talked about too often is the ability to raise a substantial additional amount of capital through debt financing. For example, Clearleap is a fast growing Atlanta technology company that raised $9 million in their Series A. Clearly raising that kind of money in their first round shows that the investors are making a big bet on the business.
Because of the backing of the high quality investors, Clearleap was then able to raise $3.3 million in debt funding, presumably co-signed by their VCs. Debt financing is typically negligibly dilutive to shareholders as the bank will receive some warrants as part of the deal, but those would represent a tiny amount of the company.
Remember that raising VC money makes no sense in most cases, but if you are going to, also remember that with debt after the VC financing, you can actually get access to a fair amount of additional capital without more dilution.
About David Cummings
David — good post. Yes, in today’s world you might get 50% of the round in debt whereas a few years ago you could almost get dollar for dollar. It is actually a good strategy to employ while raising, as if you can do it simultaneously, you can reduce the amount you have to give away as equity. Of note, normally VCs will not co-sign a loan, though the bank may be in a senior position to the VC in the case of default. It is normally due to past experience and relationships that they will sign up alongside a VC.