Venture debt, just like it sounds, is a loan for venture-backed startups. Banks like Silicon Valley Bank and Square 1 Bank have great programs where they loan money at low rates based on how much money has been raised as well as the amount of recurring revenue (see Credit Lines for SaaS Startups). Only, these lines of credit are often maxed out at ~20% of recurring revenue (e.g. have $10 million in annual recurring revenue and get a line of credit for $2 million). There’s an opportunity in the market for subordinated debt that is junior to the debt from the banks.

Here’s how it might work:

• A new venture debt fund that provides lines of credit at half the size of the banks (e.g. 10% of recurring revenue, so an extra $1 million for a $10 million run-rate startup)
• Whereas normal venture debt is often prime plus a couple percent (e.g. 6% in today’s market), this would be much higher interest rates (e.g. 12-15%) and warrants for between 0.5% and 1% of the company
• $1 million in debt at an interest rate of 15% per year would compound as follows (assuming interest only and no principal payments):
  • Year 1 – $1,150,000
  • Year 2 – $1,322,500
  • Year 3 – $1,520,875
  • Year 4 – $1,749,006
  • Year 5 – $2,011,357

This would be attractive to startups that haven’t raised money and want to grow faster as well as venture-backed startups that are trying to put off raising their next venture round until they reach a bigger milestone. For entrepreneurs averse to dilution and venture-backed startups that aren’t able to raise money at a great multiple, more aggressive venture debt could be an option to accelerate growth.

What else? What are some more thoughts on more aggressive venture debt as a market opportunity?