5 reasons why businesses fail to attract Venture Debt Funding

What is Venture Debt?

Venture Debt is an alternative debt financing, extended to the early staged, growth firms or startups. The types could be a term loan, a working capital loan, or equipment financing. Venture debt funding complements the firm’s already raised equity funding and acts as a bridge between equity rounds too. Usually, these debts are collateral-free, but investors look for certain other forms of securities.

The reason why the firms seek venture debt; because it prevents their equity from dilution and the process is comparatively quicker and hassle-free than equity funding. The businesses find it more convenient in terms of processing and the ability to serve their urgent funding needs. No doubt why "convenience" rules the current markets.

The recent tough times have turned Tech startups towards venture debt when other sources are ajar, according to Livemint.

The Venture Debt Investors usually assess the financial performance and the growth prospect of the businesses, while deciding to lend. However, the strong financials of the business are not enough to attract them. Many businesses despite performing well financially, get rejection during the diligence process itself. This could be attributed to some basic mistakes that businesses commit during the process.

Here are five of these mistakes or reasons –

Unable to communicate the mission – Often businesses fail to deliver their intentions to the Investor. Being an external party, the Investor expects the business to decipher the vision. The onus of communicating the objectives of the business lies on the borrower. Difficulty in understanding the mission – Investor calls it a quit.

Transparency – The most important of all is maintaining transparency throughout the process. The business’s hesitation to share information breaks investors’ confidence. Those worrying about confidentiality, must understand that borrower's information is kept confidential except for legal disclosure. However, this information is critical for the Investor to take their credit decision. A little pullback from the borrower’s side in such cases, pushes the Investor away.

Lack of clarity regarding usage of the fund – Businesses need to have clarity regarding the usage of prospective funding. This would only be possible if the objectives are clear and mission has been communicated properly (Look at the first mistake). Remember, it’s Investor's money and they have all the right to ensure the effective utilization of the same. Borrowers are expected to put forth their expectations clearly, in order to avoid any information asymmetry between both the parties.

Management Confidence – A majority of the investors believe in interacting with people across the organizational hierarchy. However, to understand the strategic intent, their focus lies on senior management. They seek to understand the Senior management’s confidence and ability to run the business. Any verbal/non-verbal cue, intentional/unintentional diffidence, turns them off.

Support extended during the process – It’s very important to understand that lending is a business decision for the Investor too. Looking at the criticality of the process, Investors expect the utmost attention; support; time, and seriousness from the prospective borrower. Hence, businesses are expected to help in carrying out the process seamlessly, respecting each other’s business time.

These were some of the things which a business, seeking for Venture debt, should take care of. Take home is "The diligence process differs from investor to investor but the essence remains the same. Right intention, transparency and effective communication sounds like a good recipe for funding relationships".

Happy Funding!