David Spreng is a seasoned venture and progress debt lender with 30 years of expertise, the founder and CEO of Runway Growth Capital, and the writer of All Money Is Not Created Equal.
The first step within the means of raising venture debt is a fast, introductory filtering telephone name between you and the potential lender that’s an equal quantity promoting and listening – on each side.
Think of it like a primary date. Should that go effectively, it ought to then be adopted up rapidly with each events signing an NDA. (VCs don’t like to signal NDAs, however venture debt lenders don’t have an issue with it.)
At this level, we’d begin our preliminary due diligence. We sometimes ask an organization for six issues:
An investor presentation
If you’re searching for funding money, you most likely have just lately raised fairness. The investor deck you’ll have used for that works for venture debt as effectively. (There are quite a few examples on-line.)
The 409A
The annual valuation of the fairness worth of the corporate, designed to guard staff who’re granted inventory choices in order that they will’t later be slapped with a tax for getting “cheap stock.” Usually these valuations are available at a stage that makes getting fairness engaging to staff. Don’t fear if the worth assigned by the 409A valuation agency is decrease than what you consider is truthful. We understand how these valuations work and don’t develop into fixated on their valuation.
The 409A will embody other ways of analyzing the worth of the corporate, the identical issues we take a look at: discounted future money stream; comparables to public firms; comparables to current M&A. It may even give a very good historical past of all of the funding the corporate’s ever gotten, and it at all times features a five-year projection.
An in depth capitalization desk and funding historical past
This will embody everyone who owns any piece of the corporate, a historical past of fundraising and a historical past of any financial institution financing or exterior debt used.
Historical financials
Ideally, we’ll obtain 5 years of historic monetary statements. We would like it in the event that they had been audited, nevertheless it’s not crucial.
Projected financials
For us to do our work, we would like a completely linked, three-statement monetary mannequin. The three statements are: stability sheet, revenue assertion, and assertion of money stream. If there are delays or points within the course of, it’s often due to a delay in getting linked three-statement projections, which permits us to do “what-if” analyses (similar to: “If things go worse than planned, when do things break? How much does this startup need to reduce their variable expenses to remain viable and able to service our debt?”).
Everything I’ve outlined ought to take an estimated 4-5 weeks from our first telephone name. That places it at Week 6 for a signed time period sheet.
Often we’re lending to firms that promote to massive enterprises, so as an alternative of getting one million prospects they’ve obtained 100, and we’ll wish to perceive how they promote, how predictable their gross sales forecasts are, and the way snug they’re with the approaching years. All of that helps us choose how a lot we consider of their monetary projections.
An inventory of the most important prospects, current and previous
Detailed buyer data permits us to establish buyer focus or churn. Those will be fast disqualifiers, and we don’t wish to waste a variety of anybody’s time if that’s the case.
If a possible borrower’s buyer base is too concentrated (fewer than 15 whole prospects or greater than 50% of revenues from just some prospects), that’s too dangerous for us. Or if the startup has a variety of churn – that means that their current prospects determined they’re not going to resume or stick with them – that’s one other crimson flag/doubtless disqualifier. There is nuance round this, too. If your product has advanced considerably and in what we’d take into account a optimistic, logical course, then churn might make sense.
With all this data, we are able to do a desktop evaluation that sometimes takes two weeks. We might do it extra rapidly if completely crucial, however we like to provide ourselves two weeks. If the desktop evaluation is optimistic, we’d difficulty a time period sheet.
Doing it our manner permits us to customise a considerate construction and set of phrases which can be truthful for us and acceptable for the borrower. For instance, tailoring the mortgage for the borrower could possibly be round while you really need the money. Maybe you want it instantly, or maybe it’s slightly additional down the street.
Other variations might imply structuring the deal so the rate of interest declines as the corporate will get stronger, or having an extended interest- solely interval, the place the debt isn’t amortizing, since you wouldn’t be able to begin to amortize till a sure occasion happens.
I’d estimate that every thing I’ve outlined above ought to take about 4 to 5 weeks from our first telephone name. That means you’d most likely have a time period sheet by Week 5.
Going to the board
Up till now you’d most likely solely have the CEO and CFO concerned. Once you get a time period sheet, you’d wish to current the deal to the board.
Some firms can have their board concerned from the start of the method. I’ve identified of offers that obtained derailed as a result of a board member didn’t wish to do a cope with a selected lender. It could possibly be a private (and one-sided) beef; it could possibly be {that a} board member is aware of one thing particular concerning the lender. This has by no means occurred to us, which is why I counsel a minimum of letting your board know what lenders you’re speaking to early within the course of.
How rapidly issues transfer from the board presentation step depends upon the borrower. They’ll doubtless be trying over time period sheets from totally different lenders. I’d guess 10% of the time we’re the one lender concerned. The different 90% of the time there are a number of lenders pitching to offer progress capital. The firm may be contemplating utilizing some or all fairness to fulfill their wants.
If there are three or 4 time period sheets to work by means of and examine, you’ll most likely take a couple of week to get by means of these. While a deal itself could also be comparatively easy, that doesn’t imply that each deal would be the identical. Not solely do lenders differ concerning the stage at which they may lend money, however some may even specialize by trade. Terms will, in fact, fluctuate from lender to lender.
…. to be continued
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