Fund growth capital with private debt finance
For technology companies, the only word that matters today is growth. Traditionally, growth has been financed by venture capital (VC). However, venture debt or private debt, a traditionally misunderstood tool, has also emerged as a very viable source of growth capital.
According to Pitchbook, the venture debt market has boomed, with VC-backed companies taking on more than US$80b in loans over the last three years and with debt growing even faster than the broader VC market. In 2019, the venture debt market reached US$28.2b.
At Fuse Capital, we have also helped more than 350 clients secure private debt as growth capital.
Common use cases which we have encountered include:
Funding customer acquisition plans
Executing mergers & acquisitions (M&A)
Expanding market coverage
Securing breathing room when there is meaningful change in growth strategy or leadership
There are both advantages and disadvantages to using private credit as a form of growth capital. However, before we get there, it is important to understand for whom private debt or venture debt is most appropriate for, as the application of venture debt is rather different to traditional debt.
As most technology companies do not have tangible assets to be secured as collateral, the strength of cash flows and whether a firm can raise future venture capital rounds are the most important criteria for a private lender.
Thus, venture debt is appropriate for companies with the following qualities:
- When the growth path is clear and predictable
- For early-stage companies, your growth rate is high enough to attract VC funding
- For late-stage companies, you are able to attract non-dilutive capital
- If your company does not have high growth, it must have clear fundamental business value
- Backing by reputable VCs
Why use private debt for growth capital financing
Should your company fit the bill, let us examine the growth capital options available to your firm.
Private debt can come in the form of a revolving credit line, term loan or preferred equity such as convertible bonds or warrants. Loans tend to be covenant lite. Repayments start immediately after securing a loan, though you can structure a loan and the repayment schedule to meet your company’s needs.
Raising venture capital is an expensive endeavour due to equity dilution, though the advantages are that you are not under pressure to make repayments immediately.
It is also generally accessible at all stages of a company’s development, and you can tap on a VC’s extensive network of relationships, expertise and credibility.
Banks can provide financing with lower interest rates, but this is typically only to the largest and most established firms.
As mentioned at length across all our articles, bank lending and underwriting standards have tightened considerably post the Global Financial Crisis in 2008. Further, banks continue to rely on traditional valuation models and debt metrics which are not suitable for fast growing, small-mid sized technology companies.
Evaluation of the various financing tools as growth capital
Compared to venture capital, private debt is non-dilutive and is also not tied to current valuation. A common mistake we have seen with many small-mid size technology companies is that they give away too much equity too early. Generally, private loans are not structured with warrants but even if they are, these warrants typically do not dilute ownership by more than 1%. Further, you can maintain greater control and not be subject to active involvement of the VC with private lending.
Compared to bank loans, you can take on a greater loan amount with private debt. There are a number of different methodologies in calculating loan amount for private debt, such as i) 25-30% of total equity raised; ii) 5x EBITDA or iii) 1.5x annual recurring revenue (ARR). For bank loans however, the loan amount offered is tied to current performance and disadvantaged by traditional debt metrics and loan underwriting models.
Finally, securing private debt is a much faster process and you can structure it to be a very flexible financing tool. You can also tap on a lender’s network, which is not necessarily less extensive than other VCs.
That said, all three tools are important financing tools and can be used as growth capital in varying degrees and at different times, depending on a borrower’s business model and stage of development.
How to use private debt for growth capital financing
Here's how Simplestream harnessed the power of growth capital
As mentioned, we have helped over 350 tech companies secure private debt as growth capital.
One such company we have worked with is Simplestream, a B2B SaaS company whom we have successfully worked with not once, but twice.
Simplestream offers a seamless live and on-demand streaming platform for video content delivery. The needs of the multi-device OTT world are often complex, especially as the broadcast and telco landscape changes at a rapid pace.
Fuse Capital first worked with Simplestream in 2018, where we helped the company secure a loan to support their high cash-burn as they were undergoing an aggressive growth phase.
Three years later, Simplestream hit its growth objectives and came back to us with a very impressive valuation. This time, they required a totally different deal structure to suit their new goals.
The Fuse Capital lending team had to understand how to integrate venture debt into their diverse cap structure with the right sized loan and a beneficial amortisation structure. The deal delivered needed to allow Simplestream the flexibility to spend their loan quickly and reap the rewards of a later repayment schedule.
We have since helped the firm secure a multi-million pound term loan and with an optimal deal structure.
This has allowed the firm to:
Provide a 24/7 engineering support service to all clients
Employ a product marketing manager to assist with pre-sales
Continue investment into the in-house sales and marketing team
Resource to handle at least one new OTT platform each quarter
How Fuse Capital can you help source the best private debt solution
As a debt advisory and brokerage established since 2013, we are deeply rooted in the business community.
We have close working relationships with some of the most technology savvy private debt lenders in the world and have helped over 350 technology businesses secure private debt solutions to support their growth. This means that we are able to help you save precious time by reaching out to hundreds of capital providers with one go, as well as reach out to the most appropriate capital provider, anywhere in the world for your needs, while keeping your business name anonymous.
Private debt funds like to work with us for the same reason – we save them a great deal of time. We know what they want, what companies want and we help accelerate the matching process. We are able to do this as we are like an intelligence hub – we get inbound requests all the time, both from funds and from companies.
Further, our deep expertise as debt providers and entrepreneurs allows us to evaluate your business model accurately, present a convincing case to our partners, structure a business acquisition loan around your needs and to help you fight for the best loans terms.