Venture Debt vs. Venture Capital – Series 2 of 4

03 September 2018,   By   

In the second part of the series, we take a closer look at the difference between Venture Debt and Venture Capital. Click here for the first part of the series about “What is Venture Debt?”

 

Venture Debt vs Venture Capital

When comparing venture debt with venture capital, it is essential to bear in mind that venture debt is mostly a topic for mature (ventures) companies, which make a continual profit, whereas venture capital (equity) is for still early-stage companies. (Fuse3, 2017)

Venture capitalists and entrepreneurs are intimately connected; meaning they succeed or fail together. The venture capitalists often take a seat on the company’s board of directors in order to make the potential return match the risk. On the other hand, a venture debt lender does not take on the same risks as the VC; they are hedged. A lender’s returns are linked to fees, interests and warrants (equity kicker). VCs provide a higher portion of the whole capital mix between equity and debt. VCs are an appropriate choice to attain a venture of the ground when a huge amount of capital is required. The most important drawback of the venture capital is that it can be dilutive leading to losing significantly of ownership of the founders. However, Venture debt has very limited dilution for the company’s founders, which is why owners choose venture debt after raising equity capital from VCs. (Edgington, 2017)