Entrepreneur Archive

Startup blogger and venture capitalist extraordinaire Fred Wilson recently published a great article on Venture Debt, which I strongly suggest you review HERE. Go ahead, I will wait… …welcome back. As Fred points out, many entrepreneurs hear the word “debt” and promptly run the other direction. In the past, venture debt was often viewed as a funding vehicle of last resort. When the current investors were tapped out and a bigger fool could not be brought into a venture, all eyes turn towards debt. However, when deployed judiciously, venture debt can mitigate investors’ and founders’ dilution. At Rincon Venture Partners, we are in the midst of negotiating a term sheet with a cash-positive startup that is growing aggressively. The nature of the company’s business model requires it to fund certain costs before it is paid by its customers. Thus, even though the company is cash flow positive, its growth is constrained by the amount of payables it can fund. Enter venture debt. By combining our equity investment with a tranche of venture debt, the company has avoided a larger equity round, which would have significantly diluted the Founders’ ownership share.