After a bootstrapped first year, Carputty raised its first seed round in 2020. Since then, the startup has raised over $100 million in funding, and Joshua and Tatum have spent at least as much time raising money as co-founder and CPO. We are working on building the Carputty product and team.
Tatum, who has been in the entrepreneurial world for more than a decade, said he wants to avoid “putting all of his eggs in one basket” when raising capital. Instead, he chose to use a combination of venture capital and venture debt.
“As a fintech, especially with financing products, the ideal capital structure requires a combination of equity and debt. Venture capital funds the growth of our business. Venture debt, on the other hand, funds financing. It’s essential for procurement. The combination of the two is essential to keep the trains running reliably,” he told Hypepotamus. On the VC side, the team is backed by Atlanta-based firms including TTV Capital, Porsche Ventures, Fontinalis Partners, and Kinetic Ventures. In March, the team closed an $80 million funding round, $75 of which was raised as a debt facility from Silicon Valley Bank.
Tatum isn’t alone. Venture debt, a type of non-dilutive capital, is a popular vehicle for startups looking to obtain additional liquidity without taking up more room on the cap table.
However, the venture debt landscape has waxed and waned dramatically over the past 12 months. PitchBook reports that early-stage venture debt fell more than 40% year-over-year in the first half of 2023 following the March 2023 bankruptcy of Silicon Valley Bank (SVB). While SVB is back up and running after its acquisition by First Citizens Bank, 2023 sent shockwaves through the startup world.
So who is relying on venture debt these days? To answer that question, we went straight to the bankers.
Temperature Check: What’s going on in the world of venture debt now?
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David Spren, founder and CEO of Runway Growth Capital, told Hypepotamas that this is especially true for “late-stage companies on the path to profitability.” He added that venture debt is becoming a more popular way for startups to avoid equity dilution and down rounds.
There are a growing number of places startups can turn to venture debt. That includes new entrants to the market, like North Carolina-based Conductor Capital, co-founded by some of the Southeast’s startup leaders.
Ekram Tawfik, senior vice president of venture banking at Silicon Valley Bank, said more startups are considering venture debt given the high dollar value of VC.
“Venture debt is designed to complement venture capital, but in 2021 and 2022 lenders often competed with VC. Investments from venture capital are easier to obtain and come with favorable valuations. The founders were not interested in debt because they were motivated to grow at all costs. But gone are the days when capital was cheap and plentiful,” Tawfik told Hypepotamas. Ta.
“VC funding is now a rare and expensive commodity, encouraging founders to refocus on business fundamentals and capital efficiency. As a result, venture debt is now a rare and expensive commodity for most directors. It’s been a topic of discussion at the conference, and nearly all startups raising institutional investors (from seed to Series D) consider venture debt as a meaningful addition to their capital stack.
What bankers want startups to know about venture debt
Both Spreng and Taufiq said there are still some misconceptions in the startup world about venture debt.
“The first rule of venture debt is that it is subject to (institutional investor) capital. It cannot be replaced and must be repaid at some point. Terms and conditions depend on multiple factors (size of business; Although the amount can vary widely depending on equity (quality of equity, liquidity, purpose of debt, etc.), the amount is typically adjusted to 20% to 30% of the most recent $5 million plus over 12 months. It provides an organic runway.”
He added that founders also need to understand that lenders’ underwriting processes are based on the company’s remaining liquidity (RML).
“Thus, while it may seem counterintuitive to borrow when a company is cash-rich, regardless of when a company wants to fund a loan, immediately after closing an equity round it is It has the highest power and bargaining leverage,” Tawfik added.
Spring said startups shouldn’t think of venture debt as a “last investment” just for early-stage founders.
“The reverse is also true,” he added. “Venture debt is most appropriate for late-stage companies with stable revenues and a clear path to profitability. In other words, companies that need debt the least can use it without sacrificing capital table space. They can benefit most from debt because they can provide capital.”
Between debt and equity, there are various avenues a startup can take to grow. However, Tawfik added that the key is to understand when is the right time to tap into different funding sources.
“Debt can be a powerful tool, but its effectiveness is determined by the skill of the person using it.”
