LFP163 – A Deep Dive Into Venture Debt – An Important But Underused Funding Option? w/Alex Baluta CEO Flowcap

What is called Venture Capital is most of the time actually Venture Equity – the predominant funding model for Startups/ScaleUps. But in many sectors, Fintech included, some UnlistedCos are Very large – valuations in the billions. These are no small companies. Traditional corporate finance theory says (correctly) that equity is expensive and should always be geared with debt. After all it’s what most people do when they buy a house. So for larger Fintechs and other fast-growth sector Venture Debt may well be an important tool.

Alex Baluta is CEO of Flowcap a listed Canadian provider of Venture Debt and with nigh-on thirty years of experience in investment banking as a whole is well placed to contextualise the use and abuse of both equity and debt.

My simple takeaway is with “small companies” getting ever larger that the equity:debt mix for their capital is a must-consider for their Boards – just as it is on BigCos, next to none of which fund with 100% equity. In terms of debt solutions for the growing firm Venture Debt is an avenue which must be investigated at a certain point/stage.

Topics discussed on the show include:

  • standing desks and insider secrets of how to use them
  • Alex’s career
  • an interesting conversation about equity analysts – big picture, practice, role, nuance
  • the Venture Equity market is over 10x as large as the Venture Debt market in North America
  • “Venture Debt is debt that supports the equity and provides you with an extended runway to another event specifically for venture-funded companies – so think of it as a bridge to the next round, a bridge to an IPO, a bridge to a sale”
  • the reason the Venture Equity firm and management will take Venture Debt is as they have confidence over valuations and want to avoid immediate dilution
  • classic corporate finance theory on debt:equity ratio for funding companies
  • when does one start to consider Venture Debt?
  • different Venture Debt firms have different criteria/focus
  • “there is no hard and fast rule”
  • the traditional Venture Debt market really piggy-backs on Venture Equity (Capital) firms who introduce them to potential deals
  • in these cases the VD firm is really servicing the VC firms
  • depending on the risks involved venture debt may come as low as Libor+1 to ~ 20% absolute rates
  • Flowcap do $1-5m deals and Silicon Valley Bank , the largest in the sector $30-40m
  • the role of taking warrants
  • typically, as a rough rule of thumb, returns to the VD firm might come in at 12% net of defaults plus another 3% from warrants
  • the types of VD that Flowcap do including perpetual debt
  • they are a listed/patient capital model
  • having a broad portfolio for the VD firm to dampen out the volatility
  • venture debt is relatively unknown in the London market
  • challenges over rates, returns, and terms and conditions of a raise
  • problems when it goes wrong
  • everyone loses if a firm goes down – management, VC firm and VD firm along with a pile of hassle for all – thus the motivation to avoid problems well in advance
  • VD firms do not make much after a collapse so very motivated to avoid bad deals
  • how lack of familiarity with VD affects perceptions
  • Columbia Lake Partners in London
  • how to best learn about Venture Debt
  • its geographic spread
  • base of capital versus range of investments – much more global
  • the increase in complexity and innovation in VD structures
  • how best to pitch for VD
  • Flowcap’s focus
  • the partners they are looking for

And much much more 🙂

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