Alternatives to VC Funding: Venture Debt & Revolving Credit Facilities Explained

Guest Post by Jean Laurent Pelissier, Managing Director, HSBC Innovation Banking

Although the venture capital fundraising cycle is familiar, there’s no fixed formula for growth. For most founders, it’s a case of raise and repeat: a cycle exchanging equity for the investment they need to charge to the next milestone.

That’s fine when VC funding is flowing freely. But what happens when investors tighten their belts, or expect evidence of a longer cash runway? And what about the founders who gradually give up control of the businesses they’ve worked so hard to build?

As the partner to the innovation economy, we understand that scaling tech-enabled businesses of various sizes at speed calls for different solutions, like borrowing to boost growth.

While every business is different and thus has unique needs, there are a few lending options that are designed to supercharge growth without sacrificing control.

Venture debt: Loans structured for scaling at speed

One of the most popular options for fast-growing, loss-making scale ups is venture debt, a loan that is less expensive and less dilutive than equity – but provides maximum flexibility.

In simple terms, venture debt is a loan that complements equity and does not have any financial covenants. It can be utilised in a variety of ways including providing balance sheet buffer, runway extension, enabling companies to execute on new growth initiatives not previously budgeted for, or to execute on inorganic growth.

Venture debt can be a flexible and versatile alternative to taking on incremental equity.

“We’ve used venture debt as an additional supplement to a VC round. The main advantage of this is that it is non-dilutive, meaning you can raise more without selling shares. Of course, though, you do need to pay it back either from a future round or from revenues – and that means you need to keep a very careful eye on your cashflows and projections.”

Rachel Carrell, Founder & CEO, Koru Kids

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Revolving lines of credit linked to recurring revenue or accounts receivables

As companies scale, other types of lending products can help delay the need for additional equity.

Solutions like recurring revenue facilities with availability based on a multiple of monthly recurring revenue, or facilities with availability based on accounts receivables (AR loans), are a useful way to inject liquidity or access working capital without taking on further dilution.

These products are more cost-effective than venture debt but are usually associated with additional structure (i.e. performance and/or liquidity based financial covenants).

Combined with equity and venture debt, these revolving facilities can help scale ups achieve a lower blended cost of capital by leveraging these different solutions to target various use cases.

“At Hoxton Farms, we’re building first-of-a-kind biomanufacturing facilities for cultivated fat. We’re exploring venture debt, infrastructure investment and asset-backed loans for these first-of-their-kind facilities since the high capex and long payback times are a poor fit for traditional VC. Unlike VCs, debt providers are focused on avoiding downside risk. We’ve built a pilot facility and negotiated offtake agreements to prove that our business model is fully derisked at scale.”

Max Jamilly, Co-Founder, Hoxton Farms

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Opportunity isn’t one-size-fits-all

Building and scaling a supercharged tech business is not easy, and it can make founders feel powerless, at the mercy of macroeconomic influences beyond their control.

However, there are alternatives to following the familiar fundraising path.

Whether it’s a venture debt loan to increase runway to the next raise or an AR credit line to unlock working capital, borrowing  is a way to balance your capital structure and plan ahead without sacrificing equity.

The key is to find a lender who understands that opportunity isn’t one-size-fits-all; that’s willing to build a customised solution based on your needs as well as the movements of the wider innovation ecosystem.

“We raised venture debt in December last year, which allowed us to access a material amount of non-dilutive capital. Not only has this facilitated continued rapid growth, it has also brought flexibility, support and scale through our venture debt provider. We were thorough and deliberate in our process around this, and I would advise all founders to ensure the fit is right from a relationship perspective. The importance of this relationship can sometimes be underestimated, but your venture debt provider can be a true partner to your business.”

Charlie Bullock, Co-Founder & CEO, Scan.com

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At HSBC Innovation Banking we work with the most innovative high-growth businesses and their investors across all life stages, from startup to large enterprise, within the technology, life sciences and health care sectors. Explore our lending solutions