Startup founders are often wary of taking on debt. It can feel like too risky a financial burden, coming as it does with fixed repayment obligations, regardless of business performance. Many founders fear that taking on debt could strain cash flow, limiting their ability to reinvest in growth or weather market fluctuations.
However, when used strategically, venture debt can be a powerful tool, offering financial flexibility without diluting ownership and acting as a catalyst for growth. Used alongside equity financing, venture debt can extend runway, bridge equity rounds, fund key initiatives and more. It’s about finding the right balance and using debt strategically to support growth, while keeping equity in reserve for future raises or other strategic moves.
Here are 10 key reasons why venture debt should be on the table for founders of capital-intensive startups:
1 Preserving Ownership and Control
One of the most significant advantages of venture debt is its ability to provide capital without giving up equity. For many founders, retaining control of their company is a top priority. Venture debt allows them to access the funds they need to grow the business while maintaining their equity stakes. This is particularly important in industries where multiple rounds of equity financing are necessary to scale, as each round dilutes a founder’s ownership. With venture debt, founders can strategically preserve their equity for future raises when valuations are higher.
Additionally, many venture debt providers include minimal or no covenants related to management control, allowing founders to focus on business growth rather than investor oversight. This is a key difference compared to venture capital, where investors may demand board seats or significant influence over company decisions.
2 Extending Runway for Key Milestones
Venture debt can extend a startup’s financial runway, providing crucial breathing room to hit key milestones like product launches, revenue goals, or market expansion. Startups often face timing challenges between rounds of equity fundraising, and venture debt can bridge the gap without pushing founders into raising another round prematurely.
This extra time can help startups increase their valuations by showing stronger metrics and more growth before seeking more equity capital. A longer runway also allows companies to execute on larger-scale plans without cutting back due to short-term cash constraints.
3 Faster Access to Capital
Unlike equity financing, which can take months to obtain due to due diligence, negotiations, and board approvals, securing venture debt is a more streamlined process. This means startups can access funds quickly, enabling them to capitalize on market opportunities that require immediate investment, such as expanding their team, increasing production, or acquiring key assets.
Having quick access to capital is essential for growth-stage companies, especially in fast-moving sectors like technology, life sciences, or consumer goods, where market windows can be fleeting.
4 Flexibility in Use of Funds
While equity capital is often tied to long-term strategic initiatives, venture debt offers greater flexibility in how the funds can be used. Founders can use venture debt for a variety of purposes—whether it’s to fund day-to-day operations, cover short-term working capital needs, invest in R&D, or expand into new markets. This flexibility allows founders to deploy capital in areas that have the highest immediate impact on their business, while using equity capital for those larger-scale initiatives that align with their investors’ long-term vision.
For example, startups can use venture debt to accelerate product development, roll out new marketing campaigns, or invest in infrastructure upgrades without being locked into a specific equity-driven use case.
5 A Bridge to Equity
For startups that are planning a future equity raise, venture debt can act as a bridge, providing interim capital without the need to raise another round at potentially unfavorable terms. This is especially beneficial if the company expects a higher valuation in the near future but needs capital now to maintain operations or fuel growth.
By securing venture debt, founders can delay their next equity raise until they have achieved important milestones or market traction, leading to a stronger negotiating position when they do go to investors.
6 Lower Overall Cost of Capital
While venture debt typically carries an interest rate, its overall cost is often lower than the cost of equity financing. With equity, founders give up a portion of their company, which could be worth exponentially more in the future. In contrast, venture debt provides capital in exchange for regular interest payments and the eventual repayment of the loan, without the same long-term dilution impact.
Venture debt may include warrant coverage, which gives the lender the right to purchase equity at a later stage, but the dilution is typically far less than an equity raise.
7 Reducing Equity Dilution
In many cases, founders and early investors want to protect their ownership percentage in the company, particularly before a significant exit event. Venture debt can be used to minimize equity dilution during periods of rapid growth, allowing startups to maintain ownership while still accessing the funds needed to expand.
By raising capital through venture debt instead of equity, founders can retain larger ownership stakes for future equity rounds when valuations are likely to be higher.
8 Building Investor Confidence
Securing venture debt from a reputable lender sends a strong signal to potential equity investors that your business model is sound and that the company is positioned for growth. Lenders conduct their own due diligence, so their commitment provides a form of validation. When paired with equity financing, venture debt can enhance a startup’s credibility with both existing and new investors.
This can help startups attract new venture capital and potentially improve their terms in future funding rounds.
9 Maintaining Operational Momentum
As startups grow, operational costs such as expanding teams, scaling production, or entering new markets can quickly escalate. Venture debt allows startups to maintain operational momentum without slowing down for a drawn-out equity raise. By smoothing out cash flow and covering short-term expenses, venture debt ensures that startups continue to grow at their planned pace without sacrificing longer-term goals.
10 Positioning for an Exit
For startups that are approaching an exit—whether through an acquisition or IPO—venture debt can provide the final push needed to scale rapidly or close critical deals. In many cases, having venture debt on the books can improve a company’s financial standing, as the ability to manage debt effectively is seen as a positive indicator of fiscal responsibility.
In these situations, venture debt can provide the working capital necessary to finalize deals or make strategic acquisitions, positioning the company more attractively for potential buyers or public investors.
At ATEL Ventures, we specialize in offering flexible venture debt solutions that cater to the unique needs of startups and over the past 25 years we have helped countless startups go on to major success. Read about some of them here.