Video: What can go wrong when using venture debt for your Startup?
Today we’re talking about the dangers of venture debt.
Now that sounds really scary. Venture debt’s actually a great tool for prolonging your runway and making sure your startup can hit the right milestones.
But, if you take too much debt, it can really put your company at risk. You do not want to over-leverage your company. That means taking more than probably six months of runway. And the reason why over leveraging your company can be dangerous is when the next round of investors come and look at the company, if they realize that all the money they’re putting in, all the new equity is going to pay back the lenders, then they know that the company’s not going to be able to grow.
They’re just putting money in to pay back someone else. They don’t want that. So, that can make raising the next round of capital really difficult. So, my rule of thumb is to only take three to six months of runway. Whatever it takes, whatever your burn rate is times three or six months. That’s what you should take in venture debt.
And the other dangerous thing about venture debt is you have to watch out for terms like material adverse change or investor abandonment. Those can create a default out of nowhere. The lender has a lot of power when they have a MAC or an investor abandonment clause.
So, the rules are do not over leverage your company and take too much debt, and also beware of material adverse change clauses and investor abandonment clauses.