10 Tips to Understand Venture Debt with Trinity Capital Inc.

In this episode of Scale by Numbers, James Vanreusel talks with Kevin Zeidan, Managing Director of Trinity Capital, about venture debt financing.

• Venture debt is a type of loan designed for high-growth, venture-backed companies that aren’t yet profitable. Venture debt loans typically have a 4 to 5-year duration with an interest-only period for half of the loan, followed by principal and interest payments. It’s best to align venture debt with equity rounds to supplement and extend runway.
• Venture debt isn’t a replacement for equity and shouldn’t be used as survival capital. Venture debt investors are looking to get paid back, while equity investors are aiming for huge upside. Venture debt is best used to accelerate growth, rather than save a failing company.
• When choosing a venture debt fund, founders should consider factors like:Fund’s stage in its lifecycle: How much dry powder does the fund have left to continue funding?
  • Longevity and reputation: Has the fund operated through different economic cycles? How have they treated companies during those times?
  • Loan terms: What are the interest rates, covenants, and flexibility offered in the term sheet?
  • Portfolio risk: A low historical loan loss rate indicates strong underwriting and a higher probability of success for portfolio companies.
• Founders should maintain open communication with their lenders, keeping them informed of any significant changes in the business. Transparency and a strong relationship will lead to the best outcome for all parties.
• New entrants are leveraging technology and algorithms to streamline venture debt processes. These new models may make venture debt more accessible to companies seeking smaller loan amounts. Founders should be aware of the potential risks associated with these newer funds and models, such as limited financial stability or experience navigating economic cycles.