Venture debt is a way to raise non-dilutive capital, but it is most appropraite for capital intensive businesses. Those businesses may need to buy equipment to startup their firms, but prefer to invest their venture capital in hiring talent or expanding their marketing. We raised venture debt at Course Technology – the debt was secured by the value of our computing infrastructure. It didn’t hurt that the wife of one of our venture capital investors was a partner in the venture debt firm.
Frankly I haven’t heard anything or thought much about venture debt in years until coming across the article What Does This Venture Debt Firm Look For Before Investing in Start-Ups? on Entrepreneur India. Rahul Khanna, managing director of Trifecta Capital, which has made over 50 venture debt deals in the past five years provides their criteria for making an investment.
First, “We look to partner with business in the emerging economy who are creating new categories or are clear leaders in existing categories,” says Khanna. But before doing a deal they sit down with the equity investors to make sure their expectations for the business are in alignment.
Like most VCs, Trifecta Capital back the entrepreneur. While they recognize that the founder is the expert on their business, Trifecta does attempt to highlight areas that might be a blindspot for the founder, much like equity investors and mentors.
One mistake they see, which I also see quite often, is failure to build a strong team when scaling up. Investors invest in teams, not just founders. And while a founder or co-founder can develop a product, to bring it to market and scale the company a full team, including sales and marketing executives, is necessary.
So if you have capital intensive business, have raised money from a name brand VC, and want to avoid further dilution, I encourage you to look into venture capital if you are in need of additional funding. But make sure you have a full team in place first.
