After bootstrapping its first year, Carputty raised its first seed round in 2020. Since then, the startup has raised over $100m in funding and as co-founder and CPO, Joshua Tatum has spent at least as much of his time on fundraising as he has on building the Carputty product and team.
Tatum, who has been in the entrepreneurial world for well over a decade, said he prefers to not “put all eggs in one basket” during fundraising. Instead, he opts to use a mix of venture capital and venture debt.
“Especially as a fintech with lending products, the ideal capital structure calls for a mix of equity and debt. Venture capital is funding our operational growth. Venture debt, on the other hand, is essential for us to fund our loans. The combination of the two is essential to keep the train moving steadily,” he told Hypepotamus. On the VC side, the team is backed by firms like Atlanta-based TTV Capital, Porsche Ventures, Fontinalis Partners, and Kinetic Ventures. In March, the team closed an $80 million funding round, $75 of which came from Silicon Valley Bank as a debt facility.
Tatum is not alone. Venture debt, a form of non-dilutive capital, is a popular vehicle for startups looking to get additional liquidity without giving up more room on a cap table.
But the venture debt landscape has ebbed and flowed dramatically over the last 12 months. PitchBook reports that early-stage venture debt volumes declined over 40% year-over-year in the first half of 2023, following the March 2023 collapse of Silicon Valley Bank (SVB). While SVB is back and operating after it was acquired by First Citizens Bank, 2023 sent shock waves throughout the startup world.
So who is turning to venture debt now? To answer that question, we went right to the bankers.
Temperature Check: What’s The Venture Debt World Looking Like Right Now?
In 2024, equity is expensive.
That is especially true for “late-stage companies with a path to profitability,” David Spreng, Founder and CEO of Runway Growth Capital, told Hypepotamus. He added that venture debt has become a more popular way for startups to avoid equity dilution and down rounds.
There are a growing number of places where startups can turn to for venture debt. That includes new entrants to the market like North Carolina-based Conductor Capital that is co-founded by startup heavy hitters across the Southeast.
Given the high price of VC dollars, more startups are exploring venture debt, says Ekram Taufiq, SVP of Venture Banking at Silicon Valley Bank.
“While Venture Debt is designed to be complementary to Venture Capital, lenders often found themselves competing against VC’s in 2021-2022. Founders were not interested in debt as VC investments were easy to obtain and at favorable valuations, and they were incentivized to grow at all costs. But gone are the days when capital was cheap and plentiful,” Taufiq told Hypepotamus.
“VC funding is now a rare and expensive commodity, and founders are being encouraged to focus again on business fundamentals and capital efficiency. As a result, Venture Debt is now a topic of discussion in most Board meetings, and almost every Startup that’s raising institutional capital (seed to Series D) are thinking about Venture Debt as a meaningful addition to their capital stack.”
What Bankers Want Startups To Know About Venture Debt
Both Spreng and Taufiq said there are several misconceptions about venture debt that still float around the startup world.
“The first rule of venture debt is that it follows (institutional) equity. It doesn’t replace it and has to be repaid at some point in time. While the terms and conditions can vary significantly based on multiple factors (i.e. scale of the business, quality of equity, liquidity, and objective for debt), the dollar amount is typically calibrated to 20 percent to 30 percent of the most recent $5 million plus equity round, providing 12 plus months of organic runway.”
He added that founders must also understand that a lender’s underwriting process is based on the company’s Remaining Months Liquidity (RML).
“So while raising debt when a company is flush with cash may seem counterintuitive, creditworthiness and bargaining leverage are highest immediately after closing an equity round regardless of when a company may want to fund the loan,” Taufiq added.
Spreng said that startups should not think of venture debt as a “last-ditch investment” just for early-stage founders.
“The opposite is true,” he added. “Venture debt is most appropriately suited for later-stage companies with consistent revenue and a clear path to profitability. In other words, the companies that need debt the least are the ones that can benefit the most from it since it provides capital without sacrificing space on the cap table.”
Between debt and equity, there are many different avenues startups can take to grow. But it is all about understanding when is the right time to go after different funding sources, added Taufiq.
“While debt can be a powerful tool, it’s only as effective as the skills of the person using it.”