Venture debt is a difficult decision for early-stage and growth-stage startups because they usually face different types of financial challenges and opportunities. Venture debt is a non-dilutive form of capital that can extend a startup’s cash runway and provide more flexibility without the need to dilute equity immediately. Venture debt deal activity in the U.S. amounted to a record $53.3 billion in 2024, making it the busiest year ever, with mostly growth-stage companies driving this capital toward expansion and acquisitions. In general, early-stage startups have smaller loan sizes, riskier profiles, and are more dependent on strong venture capital backing, whereas growth-stage companies take on venture debt to facilitate growth or prepare for IPOs.
This article explores the use of venture debt for startups at various stages, providing insights and examples to help founders understand its potential benefits.
What Is Venture Debt?
Venture debt is a type of debt financing that is specifically designed for venture-backed startups. It is generally structured as term loans or revolving credit lines, giving startups the ability to raise capital without immediate equity dilution.
Lenders assess a startup’s growth potential and venture capital backing when granting the loan, rather than depending only on conventional collateral. In many cases, venture debt also includes interest payments, commitment fees, and warrants—which are rights to purchase stock—thus giving lenders the possibility of extra profit if the startup is successful.
For a startup, venture debt serves as a means of extending the runway to reach milestones, fund growth projects, or bridge funding between equity rounds—often at a lower cost than equity financing.
Venture Debt for Early-Stage Startups
Startups in the early stages of development (from Seed through Series B) usually have developing products, limited revenue, and tight cash flow. For companies like these, venture debt offers several key benefits:
1. Preserve Founder Ownership and Control
Founders in the early stages typically seek to avoid dilution so they can maintain ownership and benefit more as the company grows. Venture debt enables fundraising without issuing new shares. For example, if a SaaS startup following its Series A round plans to raise $5 million but needs only $1 million for new features, an equity raise would cause unnecessary dilution. By using venture debt, the company preserves its equity position, and the founders maintain control while accessing the funds they need.
2. Bridge Between Fundraising Rounds
The startup fundraising schedule may not always be predictable because of the instability in the market or the changing investor mood. Venture debt provides an interim loan mechanism, which provides early-stage companies with that additional runway as well as the ability to achieve significant product or revenue milestones. This time extension can significantly increase valuation ahead of the next equity round.
For example, a health tech startup can postpone its Series B by 6 months by raising $2 million in venture debt to achieve clinical trials. This will prevent a down round, maintain equity, and enhance the bargaining power of the company among subsequent investors. Venture debt, therefore, gives strategic flexibility to the start-ups in unpredictable funding environments.
3. Relatively Lower Cost of Capital
Even though venture debt involves interest payments and warrants, the total cost of the debt can be lower than that of an equity round, which results in dilution of ownership and giving away future value.
Start-ups’ early venture debt can be designed with an interest-only term and repayment schedules that are easy to manage, taking into consideration runway and projected cash flow.
4. Strategic Flexibility and Increased Runway
Venture debt structures commonly have flexibility that goes hand in hand with startups’ growth plans. It is common practice for lenders to adjust the terms so that the founders can concentrate on achieving milestones rather than on short-term cash flow needs. Hence, this adaptability equips startups with the necessary agility to grow in a healthy way while controlling their liquidity without being forced to raise excessive equity.
Real-Life Scenario: Early-Stage Startup Using Venture Debt
An early-stage business scenario below demonstrates how a company used venture debt to extend its runway and strengthen its growth position.
Background:
A climate tech startup developing advanced carbon capture systems recently secured $10 million in Series A funding from a clean-energy-focused venture capital firm. With the Series A capital, the company planned to achieve technical milestones and attract pilot customers over 18 months before pursuing a Series B round.
Venture Debt Facility:
To give itself more financial leeway, the company obtained a $3 million venture debt facility from a bank focused on technology. The facility was intended to finance minor capital expenditures as well as serve as a runway extension, thus providing the company with extra breathing space in case the development timelines were to change.
Use of Funds:
The company efficiently operated using only equity capital for almost a year, so the facility remained undrawn. Later, the management decided to draw down the debt to extend the runway by six months when pilot projects required more time. As a result, the company gained deeper customer traction and strengthened its position for the upcoming funding round.
Outcome:
The company was able to raise its Series B round with a lot of success, and it also restructured the initial debt into a bigger facility that is more appropriate for its new growth stage. As a result of the strategic use of venture debt, the founders kept the majority of their equity ownership, and at the same time, they were able to make steady progress towards commercialization.
Growth-Stage Company Venture Debt
Growth-stage startups are characterized by demonstrated product-market fit, stable and often rapidly growing revenue (frequently over $10 million ARR), and a bold strategy for quick scaling. In the case of growth-stage businesses, venture debt is used as a supplementary instrument, albeit a slightly different one:
1. Capital for Aggressive Expansion
Typically, growth-stage enterprises acquire venture debt to back up their scaling activities, which may include a move into new markets, purchasing other companies, or making a large number of sales/marketing hires, without the need to dilute the ownership stakes that have already been established. For instance, a fintech firm with an annual recurring revenue of $50 million obtained a $10 million venture debt facility to buy a smaller competitor and thus fast-track its growth trajectory before going public.
2. Bridge to IPO or Exit
Venture debt is often used as a bridge facility by companies planning to go public or be acquired, in order to increase their liquidity without a new share issue, thus maintaining share price and control. The debt is used to pay for costs associated with IPO preparation, regulatory compliance, and market positioning. As an example, a late-stage SaaS company went to the market with $5 million in venture debt to pay for IPO underwriting fees while keeping shareholder value intact.
3. Optimizing Capital Structure
Expanding companies maintain a mix of equity and debt in such a way as to minimize their weighted average cost of capital (WACC). In comparison with dilutive equity, venture debt is a relatively cheap source of capital. As these companies develop, they generate better cash flows, which make it possible for them to pay back the debt, thus making venture debt a financially viable tool for facilitating growth.
4. Managing Dilution Amid Market Pressures
In times of market instability or when less equity capital is available, growth-stage companies use venture debt as a means to postpone their equity rounds. In this way, they can avoid a loss in valuation or unfavorable terms that would decrease their equity value, thus allowing the founders and investors to maintain their ownership shares.
Real-Life Scenario: Growth-Stage Startup Using Venture Debt
The case below demonstrates how a well-capitalized company used venture debt for rapid global expansion.
Background:
After a number of equity rounds from significant investors, Automation Anywhere, a top RPA company with more than 5,000 enterprise clients, took on venture debt to speed up innovation, go international, and engage in a series of strategic acquisitions.
Venture Debt Facility:
In order to keep these projects going without any additional dilution, Automation Anywhere obtained a $200 million venture debt facility from Silicon Valley Bank and Hercules Capital. The deal consisted of a $125 million term loan and a $75 million revolving credit line, providing the company with the flexibility to access funds as required for their growth.
Use of Funds:
The company took a venture debt to fasten product development, go global with the operations, and strengthen the company through strategic acquisitions. This gave the company the freedom of finance and the money for growth which it kept from the shareholders.
Outcome:
With the help of this financing, Automation Anywhere was able to grow efficiently, increase its market share, and strengthen its position as a global leader in automation. By pursuing expansion through a highly effective and less dilutive approach, the company demonstrated the use of non-dilutive capital, which is very attractive to growth-stage startups that aim to retain majority ownership in the long run.
Is Venture Debt the Right Fit for Your Business? A Self-Assessment Guide
It’s a good idea to take a close look at your company’s financial health, growth potential, and capital strategy before deciding whether venture debt is an appropriate source of growth financing. This self-assessment guide will help you figure out if a venture debt match makes sense for your business stage and goals.
Do you generate predictable revenue or have a clear path for growth?
Venture debt is a better option for companies that have, or will have, a stable cash flow. Lenders look for confidence in repayment—startups in their early stage must show a clear path to recurring revenue, whereas growth-stage companies typically have predictable revenue streams.
Is the debt that you are using for extending your runway or for accelerating your growth?
Venture debt might be a wise decision if the primary intention is to bridge to your next equity round or accelerate growth without causing dilution right away.
Can your business handle fixed repayments?
Debt, unlike equity, is a financial instrument that necessitates regular installments, so it is important to ensure that cash flow is sufficient to comfortably meet interest and principal payments.
Do you have strong investor support?
Usually, lenders assess investor strength as a key risk factor, and hence, they look at their credibility as a risk signal.
A well-regarded cap table can make your loan conditions more favorable.By utilizing a professional cap table management platform such as Eqvista, you are able to keep precise ownership records, demonstrate investor trustworthiness, and, during the negotiation of venture debt, efficiently show your company’s equity structure.
Have you checked out different lenders and their terms?
Compare several offers mainly by looking at the interest rates, covenants, and warrants to see if they go along with your growth objectives.
Venture debt could be an effective instrument to grow your business. A company that gave ‘yes’ answers to most of these questions could use venture debt to raise capital and increase its value at the early or growth stage.
FAQs on Venture Debt for Startups
The following are some frequently asked questions about Venture Debt for Startups.
What are three things to check before negotiating a venture debt term sheet?
Check these essential points first when you’re about to sign a venture debt term sheet:
- Covenants: Understand all financial and operational constraints in detail, and ensure they don’t limit your flexibility.
- Warrants & Fees: Look at the equity kicker and any additional expenses that may affect your stake in the company.
- Repayment Terms: Make sure your cash flow can cover interest and principal installments without any difficulties or extra stress.
What is the biggest mistake that founders make with a venture debt?
The biggest error that can be made is depending on venture debt when cash flow is not stable. It is meant to complement equity, not replace it. Use it to extend your runway or stimulate growth only if your business can make regular repayments.
When is the best stage to use debt?
After raising an equity round, or once your revenue becomes predictable, is the best time to use venture debt. It works well if you have investor support, are close to making a profit, and want to grow without giving up more shares.
How does venture debt impact startup valuation?
Venture debt is long-term debt that allows startups to reach milestones in growth, which may result in a higher valuation. Nevertheless, it introduces a debt burden and repayment schemes that founders should prudently handle so as not to create a cash crunch.
Can early-stage startups with limited revenue access venture debt?
Yes, although with a smaller size of loans and on recent equity raises and growth forecasts. New startups will need to have good venture capital support to obtain venture debt.
How do covenants in venture debt affect startup flexibility?
Venture debt transactions tend to have covenants (financial or operational goals) that startups are required to achieve. These may limit flexibility and require disciplined performance and risk management.
How do startups negotiate favorable venture debt terms?
Startups engage lenders in arranging interest rates, repayment cycles, and warrant coverage according to the growth strategies, focusing on milestones and cash flow projections to negotiate favorable terms.
How does venture debt support strategic acquisitions?
Venture debt is also used by startups as a fast way to fund acquisitions and expand into the market more quickly, without diluting the equity or going through an extended equity round, so that ownership and control are not lost.
Can venture debt reduce the need for dilutive equity rounds?
Yes, venture debt offers non-dilutive capital that assists startups in bridging the equity round or in circumventing small raises that may result in excessive dilution.
How does venture debt help startups prepare for IPO or acquisition?
It offers liquidity to meet IPO expenses or acquisition-related expenses and retain share price and founder control to place the firm in an excellent position to exit or go public.
Conclusion: Venture Debt Across Startup Stages
Which Stage Benefits More from Venture Debt? The answer depends on the startup’s growth level, financing needs, and investor support. Runway extension and ownership preservation are most beneficial for early-stage startups, whereas venture debt can be used to scale and exit strategically for growth-stage companies. Venture debt can be useful to both early-stage and growth-stage startups, although there is a stage effect.
Startups that are looking for flexible and non-dilutive financing can turn to Cheqly, which provides customized venture debt solutions. In addition, the company offers various financial services such as business accounts, Visa debit cards, and affordable online transfers, enabling businesses to navigate the expansion phase while maintaining control and ensuring long-term stability.
Check if your startup qualifies for Cheqly’s venture debt to grow and hit key milestones.