Venture debt is in someways a middle ground between debt and Venture Capital, whilst it is expensive it is not as dilutive as straight equity.
The typical uses of venture debt include financing revenue growth, bridging between equity rounds and pre-IPO financing. Venture debt can be used to leverage equity capital in order to increase valuations between equity rounds, reduce dilution and enhance investor return.
It also enhances the appearance of financial stability to prospective and existing customers and it allows firms to unlock restricted cash. Venture debt lenders typically look for companies that have at least 9-12 months of cash runway as this will give them time to reach the next key milestones and increase the enterprise value.
The pricing of venture debt reflects the risk to the lender, and margins range between 9- 12% with warrants up between 5%-20% of the loan (Warrants give the lenders the right to purchase shares or stock at a stated price at a certain point in time).
Venture debt can work in a fast growth company, but should be treated with caution as it is an expensive facility and the business can become overly focused on repaying high interest rates rather than running the company.