Lately, several entrepreneurs have asked me about venture debt. Venture debt is bank-provided debt for startups that have raised money from venture capitalists or have a few million in annual recurring revenue. At Pardot, we didn’t raise any venture capital but we did use a $3M line of credit from SVB. Only, I’m not seeing entrepreneurs sign up for venture debt to actually use, like we did at Pardot.
Today, entrepreneurs are signing up for venture debt as a safety net. The idea is to have the money available in the event things don’t go according to plan, but not to be used as part of the plan. Here are a few thoughts on venture debt as safety net:
- Entrepreneurs are optimistic at their core, but they also know that things don’t always work out like the plan. Having a financial back up option provides some peace of mind.
- Venture debt has a price (legal fees, closing costs, etc.) but the actual debt doesn’t have to be drawn down making it much cheaper than expected to have access to the capital
- Signing up for venture debt requires more ongoing financial rigor with the bank, but that financial rigor is a good thing in that there’s another set of eyes reviewing the business operations (e.g. someone at the bank that reviews a number of these types of businesses)
Entrepreneurs that have the scale or funding should actively evaluate venture debt as a safety net. The costs are relatively low and the value is high.
What else? What are some more thoughts on venture debt as safety net?