Debt financing can be a powerful tool for securing much-needed capital while minimizing dilution. For early-stage companies, knowing when and how to pursue venture debt can significantly impact their growth trajectory. 

We sat down with Ronny Chatterjee, Head of Capital Markets and a seasoned investor at Companyon Ventures, to get his perspective on debt financing in the startup ecosystem. 

Read on to hear his advice on how early-stage B2B SaaS and tech companies can leverage venture debt to enhance their financial runway and drive success. 

Q: Why might early-stage companies look to secure venture debt? 

Ronny Chatterjee: Every early-stage founder is sensitive to dilution—as they should be. If you want a little extra capital or some extra cash on the balance sheet but don’t want additional dilution, then debt financing can be a really interesting way for founders to maintain ownership while getting to that larger growth round where you’ll have more room to run. If you’re raising between $3 to $7 million, for example—which are the rounds that Companyon typically invests in—then venture debt can be a valuable lever to pull. 

Q: How can companies evaluate whether or not venture debt is right for them? 

Ronny: At Companyon, when we invest in a company, we immediately start with a capital planning process as part of our strategy session. So first, we’re mapping out what ARR (Annual Recurring Revenue) target is needed to raise your next round while factoring in your current cash runway given the equity round you just raised.

If we find that a major inflection point may occur near the end of a company’s runway, we start to consider whether or not debt financing should come into play. Generally, we want to make sure that you have at a minimum 12 months of runway (ideally 18), and if venture debt is something that we want to pursue, we’ll often have that coincide with an equity round as well. The best time to secure a debt term sheet is immediately after closing an equity round.

Essentially, you’ll start by mapping out the ARR target and seeing how much runway you have. After that, calculate how much more runway is needed as a cushion to get there. Those steps will shape many of your conversations around debt financing. 

Q: What are the dos and don’ts when considering venture debt? 

Ronny: Venture debt is tricky, and it’s not for everyone. The one thing I always advise companies not to do is to try and kick off a debt process when you have less than 6 months of runway. These debt firms really don’t want to get into situations where you’re raising from them to keep the company afloat. If they decide to engage, the terms will be less favorable for your company as well. 

I would also say don’t take on too much debt early on in your company’s lifecycle, as it can not only make it more difficult to manage the balance sheet but it can also become a hindrance to raise your next round if you’re not careful. 

The best time to raise debt financing is always alongside your equity round when you have the most leverage, and you don’t actually “need” any capital. This is why it is so crucial to evaluate capital planning scenarios early on.

Q: How should founders evaluate firms when deciding to engage in debt financing? 

Ronny: If you can work with a traditional bank, you’re likely to receive lower interest rates and more attractive terms. They’ll also typically make you switch over your banking relationships to them as well, which shouldn’t be a huge concern but something to consider. If you have a pre-existing banking relationship of a year or more, that will also help you in securing debt from your bank. In general, traditional banks will have more attractive terms but have a higher bar for underwriting and selecting which early-stage startups they partner with. 

Conversely, debt investment firms are more likely to engage and work with early-stage startups than traditional banks, but you’ll pay a premium for it with higher rates and overall less attractive terms. This is why we always recommend running a competitive process with several competing bids (3-5 at a minimum) to ensure negotiating power for the most favorable terms possible.

Just like the VC for your equity round, you’ll want to choose wisely regarding the right relationship—and that often means asking the right questions or knowing the right groups of people, which is where Companyon can really help. We understand that many founders don’t typically have pre-existing debt relationships they can lean on and that’s okay. We have a preferred list of debt partners that we’ve worked with and who suit our portfolio companies needs. We not only bring these firms to the table, but they offer preferential terms because they are familiar with the Companyon strategy and the types of companies we invest in.

Key Takeaways: 

Venture debt offers early-stage B2B SaaS and Tech companies a way to extend cash runway and meet important milestones needed to raise your next round of equity without further dilution. 

Founders should keep the following in mind in their pursuit of venture debt: 

1. Avoid kicking off a debt process with less than 6 months of runway left.
2. Consider the impact of taking on debt early on as it relates to other fundraising efforts and milestones.
3. Raise debt financing alongside your equity round to ensure the most favorable terms.
4. Work with a partner like Companyon for vetted access to the right types of venture debt partners.

If you found this post informative, check out our blog for more insights into the startup landscape. Our team members have been there and lived to tell the tale—now we’re here to provide advice, guidance, and insider knowledge to the next generation of startup founders.