Venture capital backed start-up and early stage businesses are increasingly taking on debt according to a February 14th article in The Wall Street Journal. Venture lenders are providing loans of $100 thousand to $10 million and more to provide leverage to companies in a wide variety of industry sectors. As always, though, high tech seems to be the hot ticket. As a result, the venture lending market seems to be at its highest levels since the late 1990s tech boom.Though the article didn't make a distinction, here's a quick explanation of the differences between a venture loan and a venture lease.
Venture loans typically provide operating capital for general corporate uses that can be used to fund product development, product or geographic expansion or acquisition of complementary technologies. The cost of such capital is normally interest, with principal, paid over a fixed period of time (usually 24 to 48 months, depending on the company’s risk profile) and a small pledge of stock warrants. The goal - a 30% or higher return on its loan. The venture lender will typically require a blanket lien on all of the assets of the borrower.
In a typical venture leasing transaction, the lessor will lease equipment to early stage companies for two to three years. The lessor receives a monthly payment which usually provides the lessor with a 12-15% rate of return. To achieve a return closer to its goal of 30% and higher, the lessor may also receive warrants to buy shares of the company when the company goes public or is otherwise sold. In lieu of warrants, some lessors may enhance its yield by selling the equipment to the lessee at a fair market value at lease expiration. The venture lessor will typically receive an ownership interest in specific assets, but not a blanket lien.
I'm working on a large venture leasing opportunity right now - as in other secured lending transactions, each funding source has its own unique set of criterion. Some like only high tech or bio-tech, others like all industries. Some will only fund deals below $2 million. Others won't look unless the deal exceeds $5 million. Some funding sources will only lend while some will only structure leases. Some will only fund to very early stage companies in product development while others look for companies who have already validated the concept and are about to go to market.
A key consideration for many funding sources is whether or not the borrowing company is already funded by a well recognized venture capital firm with which they are comfortable. The lender or lessor wants to know that someone else they trust has already validated the investment and has deep pockets to bail out the company in the event everything doesn't go to plan.
It's a jungle out there. If you need help finding the right lender or right lessor for your venture, read "Matchmaking for Business Loans" and give me a call!
Related Tags: venture, leasing, funding, lending, Wall Street Journal, venture capital
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