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 Capital
efficiency is paramount in today's economy. Today's entrepreneurs
need to stretch every dollar to achieve success. Venture lending is a
low-cost way for start-ups, even those that have not yet achieved positive
cash flow, to extend their financing horizon. That means venture lending
can be less expensive in the long run than financing your operations
entirely with equity funding.
From a financial strategy point of view, venture loans can be a useful,
even critical insurance policy. To help ensure that you reach an important
customer or product milestone, you can use venture lending to extend
the runway to achieve those milestones and enter your next equity fundraising
event with a better valuation. Most venture capitalists encourage their
portfolio companies to take on a responsible mix of debt and equity dollars.
| For example,
a communications start-up needs a round of financing totaling
$20 million. Of this amount $5 million is for equipment. The
company could try to raise the entire $20 million in equity
financing from venture capitalists, but that would cause more
significant dilution at the time of liquidity. Their financially
astute management team decides to raise $15 million from venture
capitalists and $5 million from Lighthouse in the form of equipment
venture lending. This financing model preserves more of the
employees' stake in the company and also creates a stronger
balance sheet. |
Venture lending is also handled differently from traditional bank loans.
For example, banks may require that you maintain a minimum account balance
with them equal to the amount you borrow. The practical result is that
you are borrowing your own money. At Lighthouse, we lend you our money.
Banks also often tie loans to receivables, which can be tough for companies
that are just starting to achieve revenue.
Banks also want to convert you to traditional commercial credit, and
may structure their terms to include financial covenants and letters
of credit that direct and reduce your operating flexibility. It is also
extremely difficult for banks, as regulated entities, to restructure
or refinance loans, which eliminates the possibility of flexibility just
when you might need it most.
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