Venture debt can be a powerful tool for startups, but myths and misconceptions often hold founders back from considering it. Here we examine and dispel some of the most common and persistent myths:
Myth 1: Venture Debt is Only for Companies in Financial Trouble
Fact: Venture debt is commonly used by healthy, growing companies to complement equity financing. Startups use venture debt to extend runway, accelerate growth, and reach key milestones without diluting equity. It’s a strategic financing tool for strong businesses.
Myth 2: Venture Debt Dilutes Ownership, Just Like Equity
Fact: Unlike equity financing, venture debt does not require founders to surrender any share of their ownership. This makes it an attractive option for startups looking to raise capital while preserving equity and maintaining control of the business. With venture debt, founders can grow their companies without sacrificing ownership stakes.
Myth 3: Venture Debt is Riskier Than Equity
Fact: While venture debt comes with repayment obligations, it can be less risky than equity. Equity investors often push for aggressive growth and expect significant returns, which can add pressure to a startup. Venture debt, on the other hand, often comes with flexible repayment terms and does not require founders to cede strategic control.
Myth 4: Venture Debt is Only for Late-Stage Companies
Fact: While PitchBook data suggests that most venture debt still goes to later-stage ventures, early-stage startups can also benefit from venture debt to fuel growth, expand product development, or bridge between funding rounds. As long as a company has a strong growth plan and sound financials, it can be a good candidate for venture debt, no matter its stage.
Myth 5: Venture Debt is Only for Startups in Certain Industries
Fact: Venture debt is not limited to specific industries. While it is often associated with tech and life sciences, venture debt is available to startups across a wide range of sectors, including healthcare, energy, consumer products, and more.
Myth 6: Venture Debt Limits Growth by Restricting Cash Flow
Fact: Venture debt can actually enhance growth by providing the capital needed to scale. Venture debt offers incredible financial flexibility and startups can use it to fund operational growth, hire new talent, or invest in marketing, without waiting for the next equity round.
Myth 7: Venture Debt Lenders Are Difficult to Work With
Fact: Venture debt lenders typically understand the unique needs of startups. Unlike traditional banks, venture lenders are more flexible and accustomed to working with high-growth companies. We structure deals that fit a business’s needs, providing capital without taking board seats or influencing decisions.
Venture debt is a flexible, non-dilutive financing option that can support startups at various stages and in various industries and offers significant advantages in preserving ownership, supporting growth, and enhancing financial flexibility.
At ATEL Ventures, we offer tailored venture debt solutions designed to help startups thrive. Read about some of our success stories here.