The venture debt is a venture capital investment model. And it has become one of the most viable options to invest in emerging companies. Through it, entrepreneurs find a way to raise capital to grow and thus guarantee the survival of this ecosystem.
With this model, both individual and institutional investors seeking to diversify their investment portfolio find another alternative to stimulate the development of emerging companies in the country in exchange for attractive returns. en el país a cambio de atractivos rendimientos.
The venture debt is one of the private capital models to invest in emerging companies that frequently do not have sufficient assets to cover the needs of their operation; for example, the purchase of equipment, inventory, contracts, among others.
Mechanism to trigger more start-ups
Emerging companies, in addition to being based on innovative and creative ideas, have the ability to listen and adapt to market trends and add value to their country's economy. For this reason, supporting the initial stages of startups is essential for them to consolidate.
Talking about venture debt is talking about a mechanism to trigger the growth of emerging companies. This is because it is an instrument that allows enterprises to obtain the necessary capital to go through their first years of life.
The needs that venture debt helps to cover early-stage companies are:
- Maintain liquidity
- increase valuation
- Finance capital needs
- Accelerate growth before an investment round
On the other hand, investors can find important reasons to invest in emerging companies through venture debt, such as:
- Diversify your portfolio
- Add value to entrepreneurship
- Create professional links
- Be part of innovative ideas
- Detonate the entrepreneurial ecosystem
Venture debt, convertible loan into shares?
Venture debt translates as risk debt, and refers to a loan convertible into shares. Offered by specialized funds or individual investors, exclusively to early-stage, high-growth companies. This investment instrument has become relevant in various European countries and the United States in recent years.
Private equity-backed companies received more than $25 billion in investment in 2020, according to Pitchbook's Venture Debt a Maturing Market in VC analysis, marking the third consecutive year that this market exceeded $20 billion. dollars, a record figure in recent years in this investment alternative.
According to the firm's analysis, venture debt has grown rapidly in the last decade, with numbers greater than alternatives such as private equity. What positions this investment model as one of the most attractive options for emerging companies.
Thanks to its qualities, venture debt allows companies to continue their development with greater flexibility. Its main features are:
- Obtain capital similar to a loan with fixed terms.
- No more than 40% shares of the start-up company are taken.
- From the investment, the interest that is generated is usually around between 10% and 15%
- In general, the investor does not obtain rights to participate in the board of directors of the company.
Why invest in emerging companies with venture debt?
Venture debt is a great opportunity for investors looking to access new markets by promoting emerging companies in exchange for better returns. In addition, debt funds are a way to get closer to the entrepreneurial ecosystem and to diversify the sectors and industries in which it invests.
Venture debt funds work on an investment thesis similar to that of an equity fund; however, its return is not in 10 years. This return is, in the end, an investment that is negotiated with the emerging companies.
On the other hand, for companies in an early stage, the time factor is essential, in such a way that the venture debt represents an option in the search to raise a more agile and flexible round of investment.
Venture debt modalities
Through this model, enterprises in various sectors benefit from obtaining the necessary capital for their growth and development. Emerging companies using this investment model in established markets use it:
- Capital for development. They are term loans, used in different operations of the company or working capital.
- Financing of accounts receivable. Loans to finance the accounts receivable of the company.
- Capital for equipment. Loans used for the purchase of equipment, such as the digital infrastructure of the company or the hiring of human capital.
“Debt funds or venture debt offer emerging companies the opportunity to obtain more agile financing, without the need for a valuation. There are companies that only need capital to operate and debt funds are exactly that opportunity with much more controlled risk”.
Elena Cruz, COO of Finnovista.
At WORTEV CAPITAL we have the Startup Fund that takes up the venture debt model to inject capital into small companies and startups with a nuclear business accelerator that is integrated into the operation with the aim of improving specific areas and boosting their profitability.
With our Startup Fund, we are pioneers in facilitating the participation of both individual and institutional investors who seek to boost the entrepreneurial ecosystem in Mexico, obtaining returns of 24% per year and with less exposure.