Venture Debt 101

When raising capital, founders often default to equity. It’s what’s taught in business school, celebrated at your local demo day, and visible in the media.

…and frankly if we’re being honest, it’s also the ticket to a Forbes list, a TechCrunch feature, or an appearance on the latest tech podcast—if that’s your thing.

For many reasons venture debt is often left overlooked, yet it is an extremely powerful addition to your capital stack.

What is Venture Debt? Unlike traditional loans, which rely on cash flow or tangible assets, which early stage startups typically lack, venture debt is primarily underwritten to a startup’s ability to raise future equity rounds to pay back the lender, not future cash flows.

Relatively new within private credit, it emerged in its current form in the 2010s. Venture debt typically equals 25-40% of the latest equity round, with flexible draw periods, 3-4 year terms, and minimal dilution from equity warrants.

Tailored for cash-flow-light companies, Venture Debt financing typically starts with a 6-12 month interest-only period, during which the start-up only pays the accrued interest on the amount drawn. Once the interest-only period ends, principal repayment begins, meaning the company starts making scheduled payments that include both principal and interest. Principal repayment is typically in equal monthly payments or a customized amortization schedule per the loan agreement.

Unlike traditional bank loans, venture debt often has limited or no covenants (rules imposed by a lender like keeping a minimum cash balance or hitting revenue targets) allowing founders to deploy funds more freely given the fluid nature of an early stage, sometimes pre-revenue, startup.

The catch? In practically all scenarios, Venture Debt requires a startup to be VC backed, as this is used as a proxy for a startup’s ability to raise future equity financing rounds to pay back the loan in lieu of historical cash flow.

Much like VCs, venture debt lenders assess a startup’s scalability, milestone progress, and investor strength, especially the ability for existing investors to participate in future rounds. The best time to secure venture debt is shortly after an equity raise, when a startup has at least 12 months of runway, strong momentum, and potential additional opportunities that require significant CapEx but are better funded through alternative financing rather than expensive equity capital.

The venture debt underwriting process blends that of traditional VC and commercial banking. Lenders look for startups with a scalable model, early product-market fit, and a venture-scale market to attract further investors. Strong investor backing and solid SaaS capital efficiency/retention metrics further improve the chances of securing favourable terms.

Tier 1 VCs grab headlines, but founders shouldn’t overlook venture debt. When structured well, it’s flexible, non-dilutive, and a terrific complement to equity.