It Takes Money to Make Money: How to Use Venture Debt as a Tool for Growth
Contributed by: CIBC Innovation Banking
It takes money to make money. It takes capital to fuel a high growth company, so how do you get it? More importantly, how do you get access to this fuel without eroding shareholder equity?
The answer may surprise you: Venture debt, a loan designed specifically to finance high growth business.
“When you’re a high-growth company, it’s difficult to throttle the burn rate without losing momentum,” says Mark Usher, Executive Managing Director, CIBC Innovation Banking.
“Debt financing enhances liquidity, giving companies the working capital they need to help fund their growth plans and achieve critical business objectives.”
Venture debt is non-dilutive, which means it doesn’t require giving up equity. It’s also time-efficient, particularly when considering the months of pitching required to secure equity investment and the relative speed at which debt financing is approved.
But Wait, Who Qualifies?
Venture debt is a product that breaks the two cardinal rules of lending money – ensure there’s cash flow available to repay the debt and make sure there are assets in place to cover the loss if the cash flow does not materialize as anticipated. For lenders that invest by way of venture debt, there exists a conundrum: the companies they invest in are burning cash to grow at a rapid pace, and their main asset, intellectual property, is intangible.
Amy Olah, Managing Director and Head of Canadian Originations at CIBC Innovation Banking sums up the answer: “At CIBC Innovation Banking, we look for companies with scalable business models, meaningful market size, and a well-articulated product market fit. We fund companies that are IP-driven or have raised equity from institutional investors from as early as a seed round and through all growth stages thereafter”
Existing investor quality counts: historical performance, portfolio, track record and the size and depth of the lead fund are all considered in the application.
The relationship between the business and the lead investor also matters. Will the
investors stick around for the long term? Are they interested in sequential investments? Do they play an advising role?
So, How Does It Work?
Venture debt is structured as a loan with principal and interest payments to be repaid on a specified timeline.
The amount of debt can vary, but it is designed to augment a recent equity raise with the goal of extending runway to either get the business to cash flow positive or a successive equity raise. While it can carry a slightly higher cost than traditional debt, it’s significantly cheaper than equity and allows companies to keep investing for growth.
When to Use Debt
Venture debt’s most common use is as a runway extender, buying months or an extra year of funding before founders must hit the road again to pitch for additional equity investment. The capital from venture debt financing is often used to fund growth and operations, launch into new markets, and find new customers.
Increasingly, we see later-stage companies at series C and series D using venture debt to fund acquisitions that fill a product gap or acquire new customers. This can be powerful when it is important to raise non-dilutive financing to secure a deal or when time is of the essence.
Blending debt and equity together in a single funding round can extend runway in a non-dilutive way and facilitate a higher valuation for future funding rounds. A good debt provider will act as a partner, offering experience and flexibility to founders as they continue to build and grow the value of their companies.
“CIBC was the first bank that talked in our language,” says Ali Taylor, who co-founded clinic management software Jane with her business partner Trevor Johnston. “They understood our business model.”
Relationships
As with equity investment, loans are rarely a single transaction. Success depends on deep, long-term relationships. Good debt and equity providers will share their experiences, provide guidance, make connections, and anticipate the unique needs of high-growth companies.
The entrepreneurial journey is not an easy one and certainly not for the faint of heart. “Our team’s success comes from understanding what start-ups really need to succeed – and recognizing that each company’s needs are unique,” says CIBC’s Mark Usher. “We don’t view our job as done once we write the cheque. We keep drawing on our network and experience in the start-up ecosystem to help founders navigate their own growth journey.” Finding a bank partner who has experience working with entrepreneurs is critical. You don’t want your banking partner learning on the job.
Where to Get Started
CIBC Innovation Banking has 25 years of specialized experience in growth-stage tech and life science companies across North America – a longer track record than most banks. With a market cap of $50BN and the successful funding of 300+ tech and life science companies, our team has worked through all of the financial life cycles over the past two decades. Connect with us today to start the conversation.
