Why do startups consider venture debt?

Takeaway: The primary motivation for using venture debt is to reduce dilution and extend runway, allowing a startup to finance its growth and hit key milestones without having to sell more equity at an inopportune time.

Venture debt has become a standard and increasingly important part of the startup financing toolkit. For a founder, the decision to take on debt is a strategic one, driven by a desire to be more capital-efficient and to maintain as much ownership of their company as possible. While venture equity is the primary engine for funding a startup's core growth, venture debt is a tactical tool used to achieve specific financial and strategic objectives.

There are several key reasons why a sophisticated founder and board will choose to incorporate venture debt into their capital strategy.

1. To Reduce Dilution

This is the number one reason. Every dollar you raise in an equity financing comes at the cost of dilution—you are selling a piece of your company. Venture debt, on the other hand, is non-dilutive or, at most, minimally dilutive.

• The Math: If you need to raise $3 million, you could sell 10% of your company in an equity round. Alternatively, you could raise that same $3 million as a venture debt loan, which might only require you to issue a warrant for 1-2% of the company. This is a massive savings in terms of ownership for the founders and existing investors.

2. To Extend Runway and Reach a Higher Valuation

Venture debt is often used as a "bridge" to get to the next, more valuable milestone.

• The "Bridge" Strategy: Imagine your company has 9 months of cash left, but you believe that in 15 months, you will hit a major product milestone that will allow you to raise your next equity round at a much higher valuation. You can raise a venture debt facility to provide you with that extra 6 months of runway.

• The Benefit: This allows you to raise your next equity round from a position of strength, after you have achieved a key de-risking milestone. The higher valuation you can command in that future round will result in significantly less dilution than if you had been forced to raise an equity round today.

3. To Finance Specific, Non-Core Expenditures

Venture capital investors want their equity dollars to be used for high-growth activities like R&D and hiring. They are less enthusiastic about seeing their money used to buy physical assets. Venture debt is the perfect tool for financing these specific capital expenditures without using your precious equity. This includes:

• Purchasing lab equipment or manufacturing hardware.

• Funding the security deposits and build-out for a new office or lab lease.

Venture debt is a strategic decision that allows a company to be more precise and efficient with its capital. By using less-dilutive debt for certain expenditures, you can preserve your equity for your core mission, giving you more flexibility and control over your company's long-term trajectory.

Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.