How the Most Promising Companies Use Debt

Perceptions of debt for venture companies range from “valuable financing tool” to “dynamite in the living room.” To say the least, opinions vary.

We are often asked, when should we consider venture debt financing? And…when should we hire Spinta?

Clues can be found when looking at historical data of venture companies that have IPO’d.

Overall, venture backed pre-IPO companies use debt inconsistently (or even sparingly), mainly as a complement or alternative to later stage equity funding, to finance assets, or to simply boost balance sheet liquidity.

Of note, debt “users” demonstrate very different growth rates, burn rates and recurring revenue profiles when compared to debt “non-users”. See more data HERE.

In short, debt “users” are burning far less cash and growing less quickly than their non-borrowing peers (and their valuations have a held-up better post-IPO).

Along these lines, we see venture companies benefitting most from debt when they exhibit elements of the following:

• Modest burn

• Imminent milestone (step change in revenue, break-even)

• Recurring or reoccurring revenue mix

• Asset or working capital intensive

• Suboptimal conditions for equity raise

Taking this a step further, we at Spinta generally bring the most value to situations exhibiting the following:

• Company at scale

• Cash balance getting low

• Wrinkle in credit story

• Friction with existing lender

• Premium placed on speed, optionality, or achieving outlier solution