When to raise venture debt for startups

After a successful funding round, raising venture debt may be the last thing on a founder or CFO's mind. You're flush with cash and ready to get down to business, and it's tempting to look at all the cash you have on hand and think that your runway is longer than it actually is. 

For many companies, that's a poor assumption. Worse, by the time they discover their mistake, it's often too late to do anything about it.

Instead, you'll want to explore venture debt alongside your fundraising efforts to ensure you have access to capital when you truly need it.

Why should startups raise venture debt sooner than later?

Venture debt is valuable because it's flexible. It can be the last money left in the tank as you approach a new round of fundraising or a hedge against a down round. It can also provide bargaining power as you negotiate equity funding terms. Venture debt typically doesn't come with covenants, so you can use the funds when you need them, however you need them. And if it turns out you don't need it, you don't have to use it.

Generally, the closer you can tie fresh equity into debt, the better terms you'll get. The optimal time to raise venture debt is shortly after closing an equity round. It's easier to raise equity funds from a position of strength. The same goes for debt capital. 

Typically when you're coming off a round of fundraising you'll have:

• Maximum cash on hand.

• A new valuation.

• Supportive investors.

• The right performance indicators to raise funds in the first place.

It can seem counterintuitive to raise venture debt when you're already flush with cash, but waiting too long could hurt your ability to get the best terms–or even jeopardize your ability to put a facility in place at all.

Read next: The benefits of venture debt

What happens if you wait too long to raise venture debt?

Between raises, you're burning through cash and the runway is only getting shorter. Without debt in place, you'll have no alternative but to spend down equity funding, which may not be in your best strategic interest if unexpected challenges arise. 

You're also busy running the business, which can make it difficult to go back into fundraising mode. Most of the time, the documents needed to establish a venture debt line are the same as or even less than those you've already pulled together for your investors. Waiting to raise venture debt could mean redoing all the numbers at a time when you aren’t raising additional capital.

Worst of all, waiting could ultimately mean you can't get debt funding at all, especially if your burn rate is high and you're running out of runway. In that case, your best bet may be to start talking to your banking partners about establishing a venture debt component during your next fundraise.

Make venture debt part of your fundraising strategy 

Just as the best time to apply for venture debt is alongside an equity raise, the best time to consider venture debt is when you're planning your next fundraiser. With minimal dilution to your equity, you can use venture debt as leverage as you negotiate your valuation with potential investors. You can also align your equity raise more closely with predictable expenses, since debt gives you a reserve you can use to buffer your cash flow, make strategic acquisitions, upgrade your team or expand your operations without hurting the metrics you'll need to hit for your next round. 

A debt component could make it easier to fill out a round in difficult circumstances. For example, if you have to raise $10 million, you may be able to raise $8 million in equity and $2 million in venture debt. Ultimately, you may be able to raise the same amount of money (or more) through a mix of venture debt and equity than you would with an equity-only round, but with less dilution.  

Read next: How equity dilution impacts startups

The importance of your lender 

Talking to your financial partners before your next raise can give you a head start on identifyingand assessing how venture debt could enhance your fundraising strategy. When raising debt, choosing an experienced lender with a solid track record, a steady appetite for lending through multiple economic and funding cycles and a consultative approach can help ensure your decisions are aligned with your long-term business needs. When assessing a lender, consider the ‘Four Cs’ of venture debt.  

Debt isn't appropriate in every situation. But when you understand how to use it flexibly and get it in place when you have the most leverage over terms, it can provide a quick, easily implemented source of additional funding for growing startups.