Venture Capital vs. Venture Debt

Our society needs start-ups. Long-established companies are often trapped in fixed structures and are less able to cope with e.g. B. avoid technical innovations. Fresh start-ups, on the other hand, can be fast and innovative. Since only very few of the young founders have the necessary financial means for the realization of their business idea, they have to fall back on other possibilities to get capital.

One option is financing through venture capital. However, due to the Corona crisis, a new term, venture debt, is currently coming into focus. For example, the Berlin used car start-up Auto1 is said to have secured a total of 300 million dollars (external link) in this way. Although the two terms venture capital and venture debt have a phonetic similarity due to the word “venture”, they differ greatly in content. In the following article we will therefore take a closer look at the two terms.

Business founders exchange money for shares in venture capital

The term venture capital originally comes from English. In German, this can be translated as venture capital or venture capital. Venture capital is a kind of Development Assistance for start-ups, in which an investor or private individual acquires a stake in a company through an investment and becomes a shareholder. With the equity that the investor contributes, e.g. B. Started expansions or provided funds for investments.

Venture capital investments are limited in time. Depending on the industry, the investment period can range from three to ten years. A venture capitalist usually does not hope to make a profit from current company earnings, but only upon exit from the sale of company shares.

But before the time has come and a start-up receives venture capital, it must first assert itself and present its business idea through a pitch deck or business plan. Which investment is suitable for a start-up depends on what it is in which phase this is located. At the beginning of the so-called seed phase, business angels in particular invest. In the next financing rounds, which are also called series financing, professional venture capital investors come into play. These rounds range from Series A to Series E – sometimes even further. In order for founders to be able to hope for big money, they must have already reached certain milestones, or at least prove the feasibility of the business idea by means of a proof of concept. The investor himself determines how much money flows into a start-up. This is based on how much he trusts the founders and the business model. The sum invested can therefore be seen as an evaluation of the start-up. Entrepreneurs shouldn’t put too much stock in such investments, however. It is more important to have the right investor who, for example, has a large network and gives the founders access to it.

Start-ups can fill financing gaps with venture debt

Another method of raising money to start a business is through venture debt. Especially during the current Corona crisis, many companies are in trouble because their sales are falling, there are problems with liquidity and it is difficult to find investors. More and more start-ups are using venture debt financing to ensure that money is not tight and that financing gaps can be bridged. This is provided by special companies in the form of credit agreements or bearer bonds with medium-term maturities and a fixed interest rate. If this is low enough, start-ups can get money cheaply through such financing. However, it should be noted that venture debt firms often want to secure the options to later convert part of the borrowed money into equity and to acquire shares in the company in order to later benefit from the profit on exit. The conditions for these so-called warrants, which are also known as warrants (external link), are specified when the loan is taken out. This is based on the basic data from the last round of financing. Financing with venture debt is therefore not an investment with equity, as is the case with venture capital, but rather financing with borrowed capital.

However, financing with venture debt is not equally suitable for every start-up. This type of financing is aimed in particular at fast-growing companies that have already raised capital from investors through financing rounds and have some experience. This is because the granting of venture debt is based on past values ​​(e.g. scalable business model, growing customer base and experienced management team), which are not yet sufficiently available for young start-ups that have just started. It is also a sign of quality for the venture debt financier when well-known VC investors support the founding of the company with additional capital. Venture debt financing is also mostly used to bridge the time until the next round of financing. So can important milestones be achieved, leading to a higher valuation of the start-up for a new round of financing.

Venture debt as a sensible alternative for start-ups during the Corona crisis

In summary, both types of financing have both advantages and disadvantages and these should be used depending on the situation of the start-up. While venture capital can also be used by fresh start-ups, venture debt financing is primarily reserved for start-ups that have already successfully completed a number of financing rounds and want to use venture debt as supplementary financing. This gives them the opportunity to take the start-up to the next phase without having to sell company shares – as is the case with venture capital financing. Especially now, during the ongoing corona pandemic, venture debt is suitable as additional financing for start-ups that have to struggle with lost sales and have difficulties finding an investor who is willing to provide venture capital.

Business start-up advice makes sense for founders and existing companies

All beginnings are difficult. In order to set up a successful business model, business founders who want to become self-employed should take advantage of business start-up advice. A start-up expert is always available to answer questions and help, e.g. B. when creating a business plan or determining sources of financing.

Management consulting can also be used by existing companies, for example by revising the financial plan or answering questions about the marketing strategy.

With professional advice, the chances of a successful business model increase in any case. And who knows, maybe the company will become the next unicorn. The right advice, for which there are also subsidies, can be found here under search for a consultant.