A SaaS company raised £5 million at Series A. Eighteen months later, they had burned through £4.2 million and had 4 months of runway left. They needed to raise Series B but their metrics weren't quite there. Investors wanted to see £100k MRR. They were at £78k.
We arranged £1.5 million in venture debt. The additional runway allowed them to reach £105k MRR and demonstrate clear unit economics. Six months later, they raised £12 million at Series B at a 40% higher valuation than they would have achieved if they'd raised desperately with 4 months of runway.
The venture debt cost them £180,000 in interest plus 1.5% dilution through warrants. The higher Series B valuation was worth £4.8 million in preserved founder equity. Return on the debt: 2,566%.
Here's the reality: most founders either don't know venture debt exists, or they view all debt as dangerous and avoid it completely. Both positions cost money. This guide shows you exactly when venture debt makes sense, when it doesn't, what it costs, and how to think about debt versus equity strategically.
What Is Venture Debt?
Venture debt is lending specifically designed for venture backed startups. Unlike bank loans that require profitability and assets, venture debt lends against your investor backing and growth trajectory.
How It Works
- You borrow a lump sum (typically 20% to 40% of your last equity round)
- Repayment period of 3 to 4 years with interest only period of 6 to 12 months initially
- Interest rates of 10% to 15% per year
- Warrants (options to buy shares) worth 5% to 30% of the loan amount
- Often includes covenants tied to cash balances or revenue milestones
- Typically secured against your business assets (though these have limited value in most startups)
Who Provides Venture Debt?
| Lender Type | Typical Deal Size | Focus |
|---|---|---|
| Specialist venture debt funds | £2M to £20M | Series A to C companies |
| Bank venture debt divisions | £5M to £50M | Later stage, Series B+ |
| Alternative credit funds | £1M to £10M | Flexible, various stages |
| Revenue based finance providers | £100k to £3M | Earlier stage, revenue focus |
Venture Debt vs Traditional Bank Debt
Banks lend based on current cash flow and assets. Venture debt lenders understand that startups burn cash to grow and that intangible assets (software, brand, customer relationships) are where the value lies. This fundamental difference in underwriting is why venture debt exists as a distinct category.
When Should You Use Venture Debt?
Venture debt is not appropriate for every startup at every stage. Timing and circumstances matter enormously. In our experience, founders who succeed with venture debt understand this timing precisely. Those who struggle either raise it too early (before proving metrics) or too late (when desperate with 2 months of runway).
The Sweet Spot: 3 to 6 Months Post Equity Raise
The optimal time to raise venture debt is shortly after closing an equity round when:
- Your equity raise validates your business model and valuation
- You have 12 to 18 months of runway (you're not desperate)
- Your growth metrics are strong and trending up
- You have clear milestones you want to hit before the next equity round
- You have leverage to negotiate favorable terms
Why This Timing Works:
Venture debt lenders take comfort from your recent equity raise. They're essentially betting that your VC investors did good due diligence. The fresh equity provides a buffer protecting the lender. And you're in a strong position to negotiate because you don't desperately need the money immediately.
Specific Use Cases Where Venture Debt Makes Sense
1. Extending Runway to Hit Milestones
You're 6 months from achieving key metrics (profitability, £100k MRR, break even unit economics) that will dramatically improve your next fundraise. Venture debt gives you the time to get there without diluting now.
2. Bridge to Profitability
You have clear line of sight to cash flow positive in 18 to 24 months. Venture debt can be your last institutional capital, avoiding another dilutive equity round entirely.
3. Funding Specific Growth Initiatives
You want to expand to a new market, build a specific product feature, or make a strategic hire but don't want to raise a full equity round for this specific initiative. Venture debt provides targeted capital.
4. Opportunistic M&A
A strategic acquisition opportunity arises but you don't have cash. Venture debt can fund acquisitions that are immediately accretive to your business without diluting for the full acquisition price.
5. Equipment or CapEx Purchases
You need servers, lab equipment, or other capital expenditure. Venture debt secured against these specific assets often comes at better terms than general corporate debt.
When NOT to Use Venture Debt
- When you have less than 6 months runway (you're negotiating from desperation)
- Before you've raised institutional equity (venture debt almost always requires VC backing)
- When you're already heavily indebted (more debt creates dangerous capital structure)
- When your growth has stalled or metrics are declining (lenders will decline or charge punitive rates)
- When you don't have a credible repayment plan (either revenue path or clear next equity round)
- As a substitute for fixing fundamental business model issues (debt amplifies problems, doesn't solve them)
What Does Venture Debt Actually Cost?
Venture debt is more expensive than bank debt but dramatically less dilutive than equity. Understanding the full cost structure is critical to making good decisions. Here's what actually happens: founders see "12% interest" and think that's the cost. Then they discover warrants, arrangement fees, and legal costs. The real cost is roughly double the headline interest rate when you factor everything in.
Interest Rates: 10% to 15% Per Year
Your rate depends on:
- Quality of your equity investors (top tier VCs get you better rates)
- Your growth metrics and revenue trajectory
- Size of facility (larger deals get better rates)
- Stage of business (Series B gets better rates than Series A)
- Competitive tension (multiple lenders bidding improves terms)
Expect 12% to 14% for typical Series A companies with good growth metrics. Earlier stage or higher risk deals pay 14% to 16%. Exceptionally strong later stage companies might secure 9% to 11%.
Warrants: The Hidden Cost
Warrants give the lender the right to purchase equity at a set price (typically your last round valuation). Warrant coverage is expressed as a percentage of the loan amount.
Example:
£2 million loan with 15% warrant coverage. The lender receives warrants to buy £300,000 of equity at your Series A price. If your company exits at 3x that valuation, those warrants are worth £900,000. Your effective cost of the debt just increased significantly.
| Warrant Coverage | Typical Scenarios | Approx Equity Dilution |
|---|---|---|
| 5% to 10% | Strong Series B+, top tier VCs | 0.5% to 1% |
| 10% to 20% | Typical Series A, good metrics | 1% to 2% |
| 20% to 30% | Earlier stage, higher risk | 2% to 3% |
Warrant coverage sounds small until you calculate actual dilution. On a £2 million loan representing 30% of a £6.5 million equity round, 15% warrant coverage (£300k) represents approximately 1.5% to 2% of your company's equity. This is dramatically less than the 15% to 25% you'd give up raising the equivalent in equity.
Other Costs
Arrangement Fees: 1% to 3%
Upfront fee for setting up the facility. On £2 million, expect £20,000 to £60,000. Often this can be added to the loan rather than paid from cash.
Legal Costs: £10,000 to £30,000
You pay both sides' legal fees. More complex deals or multiple lenders increase costs.
Due Diligence Costs: £5,000 to £15,000
Lender's due diligence on your business, typically focused on financial model review and commercial validation.
Total Cost Example: £2 Million Venture Debt Over 3 Years
| Cost Item | Amount |
|---|---|
| Interest at 12% pa for 3 years | £720,000 |
| Arrangement fee (2%) | £40,000 |
| Legal and DD costs | £25,000 |
| Warrant dilution (assume 2x exit) | ~£400,000 equivalent |
| Total economic cost | £1,185,000 |
Total Cost: Approximately 59% of the principal borrowed over 3 years
This seems expensive until you compare to equity: raising £2 million in equity at a £10 million post money valuation costs you 20% dilution. If the company exits at £50 million, that 20% dilution cost you £10 million. The venture debt, by contrast, cost £1.2 million.
Venture Debt: Advantages and Disadvantages
Advantages
1. Minimal Dilution (1% to 3% vs 15% to 25% for equity)
For founders, minimizing dilution preserves ownership and potential exit value. Giving up 2% instead of 20% can be worth millions in successful outcomes.
2. Extends Runway Without New Equity Round
Adding 6 to 12 months of runway allows you to hit milestones that increase your valuation for the next round. This timing arbitrage can be extremely valuable.
3. Faster and Less Disruptive Than Equity Raises
Venture debt typically closes in 6 to 10 weeks versus 3 to 6 months for equity. This means less distraction from running the business.
4. Preserves Board Control and Governance
Debt lenders don't take board seats or demand governance rights (beyond standard financial covenants). Your existing investors remain in control.
5. Signals Confidence to Market
Securing venture debt demonstrates that sophisticated lenders believe in your business. This can positively influence customers, partners, and employees.
Disadvantages
1. Debt Must Be Repaid (Unlike Equity)
If your startup fails, equity investors get zero but debt lenders have legal claims on the business. This creates downside risk that equity does not.
2. Reduces Financial Flexibility
Monthly debt service (interest and principal) consumes cash that could otherwise fund growth. If revenue stumbles, debt payments continue regardless.
3. Covenants Can Restrict Decisions
Venture debt typically includes minimum cash balance covenants, revenue milestones, or restrictions on additional fundraising. Breaking covenants can trigger default and acceleration of repayment.
4. Can Concern Future Equity Investors
Excessive debt on the balance sheet can make Series B or C investors nervous. They worry about the company's ability to service debt while scaling aggressively.
5. Only Works for VC Backed Companies
If you don't have institutional equity investors, venture debt is largely unavailable. This limits optionality for bootstrapped or angel funded companies.
Decision Framework: Should You Raise Venture Debt?
Use this framework to assess whether venture debt makes strategic sense for your situation. We use this exact framework with every startup we advise. If you can't honestly answer yes to most of these questions, venture debt is probably wrong for you right now.
Answer These Questions Honestly:
1. Do you have institutional VC backing?
If no, venture debt is likely unavailable. Consider revenue based finance or growth debt instead.
2. Do you have at least 9 months of current runway?
If no, you're too close to the edge. Focus on immediate equity raise or cutting burn. Venture debt from a weak position gets terrible terms.
3. Can you articulate a specific use for the capital?
If it's vague ("general working capital"), reconsider. Debt works best for specific initiatives with measurable ROI.
4. Will the debt allow you to hit milestones that meaningfully increase your next round valuation?
If yes, the dilution savings from a higher valuation likely exceed the debt cost. If no, you might be taking on debt for marginal benefit.
5. Do you have a credible repayment plan?
Either path to cash flow positive or high confidence in next equity round. If neither, the debt creates risk without clear exit.
6. Can you comfortably service debt payments from your burn rate?
If debt service exceeds 15% to 20% of monthly burn, it's probably too much. You need flexibility for growth investment.
If you answered yes to questions 1, 2, 4, 5, and 6, venture debt is likely appropriate.
Frequently Asked Questions
Explore Venture Debt for Your Startup
We work with venture backed startups from Seed to Series C. Honest assessment of whether debt makes sense for your specific situation, no obligation to proceed.