Innovation is what startups survive on in markets that change quickly. Redefining an existing solution, introducing a new one, or simply entering a new market segment — product development is essentially what keeps a company alive in the long run. However, innovation often comes with high costs and uncertain returns, challenges that are particularly difficult for early- and growth-stage startups.
One of the major ways these difficulties are addressed is through the use of venture debt as an essential financing tool. In 2024, most venture debt deals occurred during the late or growth stages of companies. For founders who want to grow the business without giving up additional equity stakes, venture debt is a very effective instrument for acquiring funds while keeping management and ownership intact.
This blog helps startup founders understand how venture debt can be used as a tool to support product development by closing funding gaps and enabling the continuation of the innovation process. Before diving in, let’s first look at a real-world example to see how it works in practice.
Real-World Example: Isar Aerospace Secures Venture Debt to Scale Rocket Production
Isar Aerospace, a company from Munich that builds launch vehicles for small and medium satellites, raised $20 million in a venture debt round with ATEL Ventures in 2024. The company is investing the funds in upgrading manufacturing machinery and increasing the production capacity of its Spectrum rocket to provide satellite launches at a lower cost and make them more accessible.
This strategy has helped the company accelerate innovation and growth while maintaining ownership control—demonstrating the role of venture debt in a successful product development plan.
What Is Venture Debt?
Venture debt refers to a type of loan that is set up to support venture-backed start-ups. It enables founders to obtain financing without dilution, as is the case with equity financing. Banks and other special-purpose venture debt funds provide it, and it supplements venture capital by granting loans that allow startups to lengthen their cash runway and finance important growth projects.
It is primarily utilized by venture-backed startups in the growth or post-Series A stage and is used to finance such activities as R&D, recruitment, scaling of a product, and market growth. Its objective is straightforward: to provide startups with financial flexibility to meet milestones between rounds of equity financing, retain control, and increase valuations in the long term.
Types of Venture Debt Lenders
Usually, there are two major kinds of lenders who provide venture debt, each having different expectations and risk appetites.
| Feature | Bank Lenders | Venture Debt funds |
| Interest Rates | Lower, because of the cheaper access to capital | Higher, indicating more risk |
| Financial Requirements | High: consistent cash inflow, backing from a well-known VC | More flexible and willing to provide a loan to an earlier-stage startup |
| Restrictions | More stringent restrictions on how the loan is used and reporting requirements | Less restrictive, more adaptable |
| Candidate Profile | Stable revenues with the backing of venture capital | Early-stage or less stable startups |
| Approval Process | More conservative and longer | Faster and also more tailored |
| Collateral | Sometimes, they need collateral | They might look for warrants or equity kickers |
Challenges of Funding Product Development
Innovation of a new product or enhancement of an existing one is a process that goes beyond a mere creative idea and requires a considerable amount of money. New businesses are confronted with costs such as:
- Outsourcing engineers, designers, and developers.
- Purchasing software applications and hardware.
- Market research and prototyping.
- Running product testing and beta programs.
- Marketing and launching the final product.
Such expenses can very quickly wipe out a company’s cash reserves. The problem with one solution to the situation — raising equity capital — is that it dilutes ownership. Therefore, in the case of startups that are not yet mature enough for the next funding round, or those that want to keep their equity intact, venture debt is a non-dilutive, albeit flexible, alternative.
How Venture Debt Fuels Product Development
Venture debt is a major instrument of growth as it provides startups with the necessary capital to innovate, test, and scale their new products.
1. Extending Runway for Innovation
Traditional product development schedules are known to be highly volatile due to technical difficulties, changing customer opinions, and market fluctuations. Venture debt gives startups the additional breathing room they require to develop strongly and to avoid premature fundraising.
This additional breathing space can make a simple prototype into a high-tech, ready-to-go concept that appeals to customers and investors.
2. Maintaining Equity Control
In contrast to equity financing, venture debt allows for funding without the shareholders being diluted. It is essential to keep equity because the successful launch of products leads to an increase in the valuations of the companies.
Consider, for instance, a founder holding 40% of a startup valued at $10 million. The founder’s stake might get diluted to 30% with an equity raise of another $5 million. However, a $1 million venture debt used during the intermediate period will enable the founder to keep their shareholding unchanged and still proceed with product development.
3. Bridging the Gap Between Funding Rounds
It is not always the case that product development is in line with fundraising cycles. There are times when startups are halfway through creating a new version or making changes and find themselves running out of money. Venture debt is used when startups are low in capital during the development stage of products to get bridge capital to meet milestones like beta launches, acquiring early customers, or creating important product additions.
These aims, achieved prior to an equity round, increase valuation and minimize dilution in subsequent capital raises.
4. Financing R&D and Technical Talent
R&D is often among the largest cost centers during product development, depending on the industry and business model. The involvement of highly skilled engineers, developers, and designers is an absolute necessity—most of the time, this has to be done even if no substantial revenue has been generated yet. Venture debt helps finance:
- Expansion of technical teams
- Prototyping and testing phases
- Intellectual property development (like patents)
- Acquiring specialized equipment or software licenses
It can often be secured faster to fund near-term operational and development needs, whereas equity is typically utilized to fund larger-scale growth and long-term projects.
5. Supporting Product Iteration and Scaling
Almost no successful product has a perfect stance from the beginning. Iteration—based on customer feedback and usage data—is key. However, these upgrades normally necessitate more resources.
Through venture debt, startups are able to keep enhancing their product even after launch. Whether it is for better UI/UX, new features, or more advanced back-end systems, having access to a flexible capital source means that innovation is not put on hold after the first release.
In the case of SaaS startups, it may involve the development of an analytics dashboard or the improvement of infrastructure to maintain the pace of innovation and meet the increasing demand of more customers.
6. De-Risking Product Launches
The introduction of a new product is costly—marketing, distribution, and customer onboarding, as well as logistics. These important activities are financed by venture debt and are used to start up:
- Conduct marketing campaigns on launches.
- Obtain the first inventory or production.
- Customer support setup
- Distribution or logistics expansion
The approach allows startups to test out demand and market response and only raise more funds when they are certain those targets will be met.
7. Building Financial Flexibility
Startups also work in unstable conditions where the priorities change fast. Venture debt provides the financial flexibility required to take advantage of new market opportunities or make product roadmap changes fast, without utilizing equity or running cash reserves dangerously thin.
Understanding Debt Covenants and Compliance
Debt covenants are requirements that lenders include in venture debt agreements to minimize their risk. They outline the financial and operational norms that a startup must follow to be considered a healthy business.
Common covenants include:
- Minimum Cash Balance: Constantly holding a fixed amount of liquid assets.
- Revenue or Performance Milestones: Meeting certain monthly recurring revenue (MRR) or annual recurring revenue (ARR) goals.
- Equity Support: Requiring ongoing support from current investors.
- Reporting Requirements: Providing financial statements regularly, along with updates.
Breaking these agreements may lead to penalties, accelerated repayment, or the calling of the loan. Founders must negotiate terms that are feasible and reflect both the growth rate of their business and their cash flow projections. It is very helpful to understand and manage such requirements from the beginning to avoid unexpected issues at later stages of your company’s growth.
When Venture Debt Works Best for Product Development
Though venture debt can be a great tool, it is not appropriate for every case. It is most effective for startups that fulfill specific criteria:
- Strong Equity Backing: The existence of credible venture capital backing for startups makes it easier for them to access venture debt, as lenders can view the equity investors as confirming growth potential and reducing risks.
- Predictable Revenue or Growth Metrics: The presence of easily identifiable sources of revenue or indicators of growth, e.g., monthly recurring revenue (MRR) for SaaS or annual recurring revenue (ARR), makes lenders more confident in the capacity of a startup to repay debt.
- Clear Product Roadmap: Companies that have a clear product development strategy and milestones that can be quantified have an increased chance of getting venture debt, since lenders seek to know that funds will be wisely used, as they will result in tangible advancements.
- Healthy Cash Flow Management: In general, startups require having a solid liquidity condition with enough cash runway—usually 12 to 18 months, not counting the venture debt—and a current ratio of more than 1.5 to be able to show the power of making the debt repayment in a responsible way.
What Happens If the Product Fails or Milestones Are Missed?
Not all innovative ideas turn out to be successful — and this is a risk that lenders take into consideration. Still, startups must be aware of the consequences of not reaching their milestones or of their product failing.
This is generally how lenders respond:
- Restructuring: Repayment terms may be extended by lenders, or they may offer a grace period.
- Equity Conversion or Warrant Exercise: In extreme situations, debt can be converted into equity according to the agreed terms.
- Collateral Enforcement: In the case of secured debt, lenders may take possession of the collateral; however, this is generally their final option.
Failing scenarios are best managed through transparent and early communication. Open discussions with lenders may facilitate term renegotiation or help maintain borrowing relationships in the future.
Venture Debt & Product Development FAQs
Here are answers to common questions startups have about using venture debt to fuel product development while preserving ownership.
How are venture debt loans typically structured?
Typically, venture debt loans are designed as term loans with a maturity period of about 2–4 years. These loans may include an interest-only period (6–12 months), after which both principal and interest payments begin. To enhance returns, some lenders also attach warrants—minor equity rights.
What interest rates should founders expect?
Generally, interest rates range from 8% to 15% and are influenced by the startup’s risk profile, stage of development, and the type of lender (bank or venture debt fund). Because of their greater flexibility and risk tolerance, venture debt funds often charge higher rates.
Can venture debt be refinanced or replaced later?
Yes. If a company raises a new equity round or improves its financial position, it can refinance or pay off the venture debt to lower interest expenses. However, prepayment fees may apply if the debt is repaid early.
How should founders choose between lenders?
Bank lenders offer lower interest rates but require stronger financials and investor backing. Venture debt funds are faster and more flexible but tend to be more expensive. Founders should weigh the trade-offs between cost, speed, and flexibility based on their development stage and risk tolerance.
What should founders avoid when using venture debt for product development?
Founders should avoid over-leveraging, misaligning repayments with cash flow, and poor communication with lenders. It’s crucial to borrow within means and ensure that usage of funds drives measurable product and revenue milestones.
How do warrants impact dilution in venture debt?
Warrants give lenders the option to purchase equity at a predetermined price in the future, which can cause some dilution. However, the dilution from warrant exercises is typically much lower than that from an equity round.
Are there geographic or sector restrictions for venture debt?
Yes. Some lenders focus only on specific regions or industries. Therefore, startups should identify lenders aligned with their sector to improve the likelihood of securing a deal.
Venture Debt: Fueling Innovation Without Diluting Ownership
For startups, creating new products means gaining new opportunities but also facing some challenges. Although early fundraising may cause the entrepreneur’s share to be diluted, venture debt is still a very important tool that the startup can use to continue innovating without having to give away equity or lose control.
Venture debt, when used strategically and responsibly, is not just an alternative source of funding—it can enable sustainable business growth and expansion. It helps extend the startup’s cash runway, allows founders to maintain control, and supports achieving product milestones that can lead to higher valuations.
At Cheqly, we empower startup growth by providing tailored venture debt solutions that fund product development without dilution. At the same time, we also offer other necessary financial services, such as low-cost online transfers, business accounts, and Visa physical and virtual debit cards.
Find out if your startup can leverage Cheqly’s venture debt to accelerate innovation and expand operations.