Venture Debt for Tech Startups

# Venture Debt for Tech Startups: When It Makes Sense (And When It'll Wreck You)

Here's something most founders don't want to hear: venture debt can be genius, or it can accelerate your path to insolvency. The difference? Whether you're using it as rocket fuel or as a Band-Aid for a broken business model.

I've watched 30+ portfolio companies navigate this decision over the past five years. About 40% got it right and used venture debt to extend runway and hit critical milestones. The other 60%? They either passed when they should have taken it, or worse—took it when they absolutely shouldn't have.

The conventional wisdom says "debt is cheaper than equity." That's technically true but practically misleading. What matters isn't the cost—it's whether the debt helps you unlock disproportionate value. Let's cut through the bullshit and look at when venture debt actually makes sense for tech startups raising capital.

## The Reality: Venture Debt Isn't Actually Debt

First, stop thinking about venture debt like a bank loan. It's not.

Traditional banks lend against assets and cash flow. Venture debt lenders are making a bet on your next equity round. They're basically saying: "We think you'll raise a Series B at 2-3x your current valuation within 18-24 months, and we want to clip 2-3% of that upside while collecting 10-12% interest."

Here's the real math that matters:

A typical venture debt facility is 25-40% of your last equity raise. So if you raised a $10M Series A, you might access $2.5-4M in debt. You'll pay:

- **10-12% annual interest** (cash or PIK)

- **Warrants for 1-3%** of the loan amount (usually at your last round price)

- **Origination fees** of 1-2% upfront

On a $3M facility, that's roughly $360K in interest annually, plus $30-90K in equity via warrants, plus $30-60K upfront. Total first-year cost: ~$450K, or 15% effective cost.

Compare that to selling equity. At a $40M post-money Series A, raising $3M means diluting 7.5%. But if that $3M helps you hit milestones that double your valuation for Series B, you've avoided selling $6M of Series B equity for $3M of capital.

The math works. But only if you hit those milestones.

## When Venture Debt Actually Makes Sense

### 1. Extending Runway to a Clear Milestone (18-24 Months Post-Equity)

This is the golden use case. You've raised equity, you're executing well, but you're 6-9 months short of your Series B target metrics.

**Real example:** One of my portfolio companies raised a $12M Series A in Q1 2023. By Q3 2024, they were at $4.5M ARR, growing 15% MoM, with exceptional retention (125% NDR). Series B target was $8M ARR.

Without additional capital, they'd hit $7M ARR before running dry—close, but not close enough for a clean raise in a tough market. They took $4M in venture debt in November 2024. That bought them 9 additional months to clear $8M ARR and raise Series B at a strong valuation.

**The criteria that made this work:**

- Strong unit economics (CAC payback under 12 months)

- Proven GTM motion (knew exactly where money would go)

- Conservative scenario hit the milestone with 3+ months runway remaining

- Multiple term sheets from debt providers (market validated the plan)

### 2. Non-Dilutive Growth Capital When You Don't Want to Raise

Sometimes you're growing well but don't want to raise equity yet because:

- Market timing sucks (down rounds everywhere)

- You want another 2 quarters to improve valuation significantly

- You're between "good but not great" and "exceptional"

**Key requirement:** Your growth must be profitable or near-profitable. If you're burning $500K/month with 50% gross margins, venture debt isn't going to help—you're just delaying an inevitable equity raise at worse terms.

I saw this work brilliantly with a fintech that was at $15M ARR, growing 50% YoY, with 70% gross margins and only $150K monthly burn. They could have raised Series C but wanted to cross $25M ARR first. Took $5M in debt, hit $24M ARR 10 months later, then raised Series C at a $200M valuation instead of $120M.

### 3. Specific Equipment or Asset Financing

If you need to buy servers, manufacturing equipment, or other hard assets with resale value, venture debt makes perfect sense. The lender has collateral, you get better terms, and you're not burning dilutive equity on capital expenditure.

This is less common for pure SaaS plays but critical for hardware-enabled tech, deep tech, or companies with significant infrastructure requirements.

## When Venture Debt Will Destroy You

### 1. You're Using It Because You Can't Raise Equity

This is the death spiral. You're talking to VCs, getting "not yet" or "too early," and a venture debt provider says yes. Feels like a win, right?

**Wrong.**

If equity investors—whose literal job is to take risk on growth—aren't excited, why would adding a fixed obligation improve your situation? You're now on a clock with a monthly interest payment and an obligation to raise equity within 18-24 months, but your business hasn't improved enough to warrant investment.

I watched a Series A company take $2M in venture debt in mid-2023 after failing to raise Series B. The debt gave them 9 months. They still couldn't raise Series B. The debt came due. They had to do a brutal down round at 40% of their Series A valuation, with the debt converting at the down round price. Carnage.

**Red flag:** If fewer than 3 reputable VCs are excited about your business, debt is just expensive runway to the same problem.

### 2. Your Business Model Doesn't Work Yet

Taking debt before you've proven product-market fit or unit economics is founder malpractice. Period.

Venture debt assumes linear or accelerating growth. If you're still figuring out your ICP, testing pricing, or searching for a repeatable sales motion, you need equity—patient, flexible capital that doesn't have a repayment clock.

**The test:** Can you articulate exactly how you'll deploy the capital to hit specific, measurable milestones? "Hire sales people and increase MRR" is not a plan. "Deploy $2M across 6 AEs in APAC enterprise ($200K OTE each, $800K quota, 18% win rate, 4-month sales cycle) to add $3.6M ARR over 12 months" is a plan.

If you can't get that specific, you're not ready for debt.

### 3. You're Within 6 Months of Running Out of Cash

Venture debt typically takes 6-8 weeks to close. If you're desperate, you'll get worse terms, less flexibility, and you'll be negotiating from weakness.

Plus, lenders want to see at least 9-12 months of runway remaining when you close. If you're at 6 months, they'll either pass or charge punitive rates.

**The discipline:** Talk to venture debt providers when you have 18+ months runway. Close when you have 15+ months. Use it to get to 24+ months. That's the healthy pattern.

## The Venture Debt Landscape: Who to Talk To

Not all venture debt is created equal. There are basically three tiers:

### Tier 1: Silicon Valley Bank (now First Citizens), Western Technology Investment, TriplePoint

- Best terms (lowest interest, smallest warrant coverage)

- Most competitive (they want strong companies)

- Typically require existing VC relationships

- $2M+ facilities

### Tier 2: Lighter Capital, Clearco, Bigfoot Capital

- More flexible criteria

- Slightly higher cost

- Good for earlier-stage or non-VC-backed companies

- $500K-$5M facilities

### Tier 3: Revenue-Based Financing (Pipe, Capchase, etc.)

- Not technically debt, but functions similarly

- Repayment tied to revenue (typically 1-8% of monthly revenue)

- Easier to qualify for

- Expensive (effectively 15-40% APR depending on growth rate)

**Pro tip:** Always get at least 2 term sheets. Venture debt terms vary wildly, and competition improves everything—interest rates, warrant coverage, covenants, and financial reporting requirements.

## The Real Costs Nobody Talks About

Beyond interest and warrants, venture debt comes with hidden costs:

### Financial Covenants

You'll typically need to maintain:

- Minimum cash balance (usually 30-40% of the loan amount)

- Revenue targets or growth rates

- Burn rate limits

**Miss these and you're in default.** Even if the lender doesn't call the loan, you're now in violation, which tanks your negotiating position for everything—equity raises, strategic deals, acquisitions.

### Reporting Requirements

Monthly financials, quarterly board presentations to the lender, annual audits. This adds real overhead—figure 10-15 hours monthly from your finance team.

### Psychological Weight

Debt has a clock. Equity doesn't. I've seen founders make suboptimal decisions (bad hires, wrong market pivots, premature scaling) because they felt pressure from debt maturity.

The best debt takers are those who can psychologically treat it like equity—patient capital they'll deploy thoughtfully—while respecting the hard deadline.

## The Framework: Should You Take Venture Debt?

Here's the decision tree I walk founders through:

**Ask these questions in order:**

1. **Do you have 15+ months of runway currently?**

- No → Fix this with equity first

- Yes → Continue

2. **Can you articulate a specific milestone you'll hit with 90%+ confidence?**

- No → Not ready for debt

- Yes → Continue

3. **Does hitting that milestone materially improve your equity raise prospects?**

- No → Debt doesn't make sense

- Yes → Continue

4. **In your worst-case scenario, do you still hit the milestone with 3+ months runway?**

- No → Too risky

- Yes → Continue

5. **Can you get at least 2 competitive term sheets?**

- No → Market doesn't believe in your plan

- Yes → Debt makes sense

If you answered yes to all five, venture debt is likely a smart move.

## The Negotiation Points That Matter

Most founders accept the first term sheet. Don't. Here's what's actually negotiable:

### Interest Rate

Standard is 10-12%. With strong metrics or multiple term sheets, you can get 8-10%. Push here—every point is $30K annually on a $3M facility.

### Warrant Coverage

Typical is 1-3% of loan amount. Strong companies get under 1%. If they're asking for 5%+, that's a red flag about what they think of your equity raise prospects.

### Prepayment Penalties

Some lenders charge 1-3% to prepay early. This sucks if you raise equity sooner than expected. Push for no penalties or penalties only in first 12 months.

### Covenants

Everything is negotiable. Don't accept revenue targets you're not 95% confident you'll hit. Buffer your cash minimum covenant by 20%.

### MAC Clauses

"Material Adverse Change" clauses let lenders call the loan if things deteriorate. Get specific about what constitutes MAC—don't leave it vague.

## The Geographic Reality: Australia and APAC Context

One critical note for Australia and APAC-based companies: your venture debt options are more limited than in the US.

**Key differences:**

- Fewer dedicated venture debt providers (mainly Radium Capital, MaxCap, and a handful of others in Australia)

- Higher interest rates (typically 12-15% vs. 10-12% in US)

- Smaller facility sizes relative to equity raise

- More conservative underwriting (want to see path to profitability, not just next equity round)

**This means:**

- APAC companies often need to approach US-based venture debt providers

- You need stronger metrics to qualify

- The decision bar should be higher—only take debt if it's clearly better than raising equity

I've seen several Sydney-based Series A companies pass on available venture debt because the terms weren't compelling enough, then successfully raise Series B without it. The optionality is valuable, but don't take expensive money just because it's available.

## The Bottom Line: Venture Debt Is a Tool, Not a Strategy

Here's what I tell every founder considering venture debt:

**Venture debt is a tactical amplifier for an already-working strategy. It's not a replacement for equity, not a bridge to figure things out, and not a solution to a broken business model.**

The best venture debt deals I've seen were ones where:

- The company could have raised equity but chose debt for strategic reasons

- The capital deployed to a specific, high-confidence plan

- The founder thought of it as "buying time to create more value" not "delaying hard conversations"

The worst venture debt deals were:

- Desperation capital when equity wasn't available

- Vague deployment plans with squishy milestones

- Used to paper over fundamental business model problems

If you're crushing it and want 9-12 months to get even better metrics before Series B, venture debt is brilliant. If you're struggling and hoping debt buys time for a miracle, you're just making the inevitable harder.

**Key takeaways:**

- Venture debt works when extending runway to a clear, achievable milestone

- It fails when used as a Band-Aid for a business that can't raise equity

- Always get 2+ competitive term sheets

- Factor in total cost (15%+ including warrants and fees)

- Only works with proven unit economics and specific deployment plans

- APAC companies face fewer options and higher costs—bar should be higher

Need help thinking through whether venture debt makes sense for your situation? Or figuring out the right GTM strategy to hit those Series B milestones? Let's talk.