Ten Tips for Raising Venture Debt in 2024

If you’re looking to raise venture debt, then these ten tips are for you! While we can’t guarantee that you’ll raise simply by following them, we can say that your odds of success and ultimate outcome will be better. Having gone through the process a few times now, these are the things we wish we would’ve known ahead of time! If you’d like clarification on any of them, or if you’d like to grab time to discuss, reach out: founders@arc.tech. Let’s dive in!

Tip #1 - Determine if you’re qualified before starting the process

Before you go down the rabbit hole of applying for venture debt, make sure you’re actually qualified. No, you don’t have to raise a massive round to qualify, and no you don’t have to be generating tens of millions in revenue. What you need to have is a decent cash position, or assets on your balance sheet, positive unit economics, and strong financials. If you have loads of debt on your balance sheet already, high monthly burn, and runway of less than 3 months, you won’t qualify. Check out this guide for the requirements to qualify for venture debt.

Tip #2 -  Get your finances in order

So you’ve determined that you might be qualified for venture debt, great! Before you approach any venture debt providers you’ll want to get your finances in order. Make sure to update your P&L statement, your A/P system, your outstanding receivables, your headcount plans and projections for the next 12-18 months, and so on. If you’d like help getting these sorted, or if you’d like an intro to an accounting provider check out our partner page.

Tip #3 - Calculate how much capital you need

This one is crucial. Overestimate how much capital you need and you may end up with an unnecessarily large debt burden; underestimate, and you risk running out of funding before your next milestone. To calculate how much funding you need, review all the financial docs you gathered to kick off the raise. Then review your revenue targets for the upcoming 18-24 months, and work backward based on your current conversion rates to determine how much capital you’ll need to spend to get there. Remember to bake in additional headcount to support the new customers you plan to onboard. Pro-tip: make sure to add a buffer of 25-50% in case your assumptions are incorrect, you experience some headwinds, or the market flips.

Tip #4 - Utilize the top-down approach for identifying potential venture debt partners

In general, there are two strategies for identifying potential venture debt providers: bottoms up and top down. If this is your first time raising venture debt, we highly suggest starting with the top-down approach. This will help speed up the process, and if you play your cards right, you might even get a referral to their contact at the provider, which, as you know, can certainly help speed up the process.

• 1) Bottoms up -  identify the entire universe of potential partners, then narrow the list based on their focus, size, terms…etc. 
• 2) Top-down - ask your founder friends and the VCs on your cap table who they’ve had positive experiences working with. If you don’t have enough, fill the list using method 1.

Tip #5 - Know your numbers inside and out

Assuming your outreach is fruitful and you book meetings with venture debt lenders, you’ll want to spend a significant amount of time preparing. You’ll want to know your financials inside and out, and you’ll want to be prepared to explain precisely how much capital you are looking for, the specific use case of said capital, and what you’re looking for in a partner. Here are some of the metrics you’ll want to know off the top of your head.

• How much revenue you are generating
• What your revenue growth rate is
• What your revenue concentration is
• What your monthly churn is
• What your monthly burn is
• How much runway you have remaining

Tip #6 - Seek out legal counsel

If all goes well in your initial meetings, you’ll enter the due diligence process and maybe even receive a term sheet or two. At this point, you should seek legal counsel to help facilitate your raise and negotiate terms on your behalf. Expect to spend anywhere from $5,000-$25,000.That said, try to get the legal firm to work on a project basis if you can, Lawyers love to talk (and argue) and they bill by the hour so your cost can quickly skyrocket. Also, as the saying goes, you get what you pay for, so if a no-name legal firm offers to represent you at low or no cost, it's best to avoid them. To find counsel, go back to your network and ask for a warm referral, chances are you’ll find the perfect fit.

Tip #7 - Nail the negotiation process

Check out the entire guide we wrote on comparing term sheets and nailing the negotiation process, here’s the TL;DR:

• Set clear objectives and priorities - These should include the amount of capital you are looking for, the uses for the capital, the timeline in which you’d like to pay it back, and the ideal structure of the loan.
• Establish your non-starters and semi-negotiables - these are the things that you would not accept no matter what the other terms were, and the items that you would not be happy with accepting, but could stomach.
• Heatmap the key terms  - start with the basics (interest rate, term length…etc.), then work into the complexities: covenants, provisions, and clauses.
• Ink the deal - When you’re happy with the terms and the provider, sign on the dotted line.

Tip #8 - Avoid these covenants, clauses, and provisions

Covenants, clauses, and provisions protect lenders from default and help startups maintain sustainable growth trajectories. That said, when things don’t go as planned, they can be detrimental to your operations. There are a handful of standard terms that all lenders will require, and then there are terms that are downright predatory, which are outlined below:

• #1 - Cross-Default Provision
• #2 - Cross-Acceleration Provision
• #3 - Investor Abandonment Clause
• #4 - Maximum loan-to-value ratio
• #5 - Capital Expenditure Covenant

Check out this guide for a more in-depth look at what the most common venture debt covenants, clauses, and provisions are and the ones you should avoid (the five above).

Tip #9 - Avoid the most common venture debt pitfalls

Most founders go into the venture debt process with blinders on, don’t be like them. Make sure that you properly forecast your capital needs, and account for market variability so you don’t overleverage or underleverage your startup. Also make sure that have a plan coming into it, and that you can stay on track with the required payments. Finally, make sure that you compare apples to apples, and only use venture debt if it's truly the best option for your needs. For a more detailed breakdown, check out the 7 venture debt pitfalls and "gotchas" to avoid in 2024.

Tip #10 - Ensure a successful post-raise

Now that you’ve signed on the dotted line, you must follow through with your commitment. Before you draw down the facility, ensure that you have a clear picture of what you’re going to use that tranche of funding for. As you begin the repayment process, ensure that you have accounted for the debt obligation in your forecasted P&L and runway calculations. If things don’t go as planned, make sure to proactively communicate with your lender, as they have the ability to restructure your facility.

Bonus: Tip #11  - Celebrating a Successful Raise

If you’ve closed a venture debt facility take a moment to celebrate your success, as this milestone marks a significant step in fueling your company's growth. P.S. we’re proud of you!

Summing it all up: the ten tips for nailing your next venture debt raise

We hope the tips above will help you make the most out of your next venture debt raise. In summary: make sure you are qualified, get your finances in order, and determine preciously how much capital you need before you start the process. Then identify your ideal partners, prepare for the initial meeting, and kick off the conversations. Once you’ve received a term sheet, engage legal counsel, start the negotiation process, and ensure that you avoid the common pitfalls, as well as the most detrimental covenants, clauses, and provisions. For more tips, check out the startup founders’ guide to raising venture debt in 2023.

As mentioned, we’re by no means legal professionals, and this guide is by no means legal advice, but if you’d like an extra set of eyes (or hands) reviewing your term sheets, or if you’d like introductions to venture debt providers, we’d be happy to help out. Get in touch with us!

Happy Building!