Let’s discuss one of the most influential yet misunderstood weapons in the startup universe: venture debt. If you’re creating a high-growth startup, you’ve likely heard it passed around at board meetings or in hushed tones at founder happy hours. But what exactly is venture debt, and why do so many veteran entrepreneurs—and institutions such as Silicon Valley Bank (SVB)—use it as a pillar of intelligent startup funding?
What Is Venture Debt, and Why Does It Matter?
Venture debt is a form of financing created specifically for early-stage, VC-backed businesses. It differs from bank loans, which usually demand profitability or hard assets, because venture debt is a bet on a startup’s future. It’s intended to be used in addition to venture capital—never instead of it. As SVB would say, “Venture debt follows equity.” It means that lenders prefer to see credible investors already having confidence in your business before lending.
It’s a funding strategy customized for rapidly growing startups that want additional fuel but don’t wish to sacrifice more equity than is required.
Equity vs. Debt: Making the Correct Decision
Raising equity involves selling off some of your company in return for cash. You don’t have to repay it right away, but you’re watering down your ownership with each round. Venture debt, on the other hand, allows you to get money now with the promise that you’re going to repay it, usually with interest and on a set schedule.
It’s a clever means of tapping out your runway, acquiring critical talent, or covering your next round of funding, without having to sacrifice more equity up front. It’s not, however, free money. Venture debt is most appropriate for firms that have existing VC backing and a strong growth path. As industry commentators assert, “Venture lenders view VC backing as an important validation tool in underwriting their loans.”
How Much Can You Raise—and When’s the Right Time?
There isn’t a magic formula, but most venture debt deals are generally between 25% and 35% of your last equity raise. So if you just closed a $4 million Series A, you might qualify for another $1 to $1.4 million of venture debt.
Timing is everything. This kind of financing is best used as a strategic stretch of your capital, not as a lifeline. It’s great for reaching major milestones, funding capital expenditures, or hiring that important person, without incurring another round of equity too soon. But with caution: debt is a commitment. And as many founders know, “the day you need to repay might not always align with your ideal financial timeline.”
SVB: The Visionary Who Pioneered Venture Debt
SVB not only entered the venture debt market, but they established it. With decades of experience financing startups, they’ve evolved beyond a lender. SVB is a go-to advisor, providing industry expertise, founder education, and an international network of investors and partners.
Their method is built on trust and reliability. As they themselves repeatedly state, “Transparency and predictability are the most important criteria to seek in a venture debt lender.” It’s not check-writing—it’s relationship-building that stands the test of time from seed to IPO.
The 2023 SVB Crisis: A Stress Test for the Ecosystem
When SVB faced an unexpected liquidity and solvency crisis in March 2023, the startup world waited with bated breath. The FDIC moved quickly to cover depositors, including even those above the $250,000 limit. As founders exhaled at being able to access their funds once more, they all wondered what the future is for SVB’s $6.7 billion venture debt book.
SVB’s new leadership moved swiftly to soothe the waters. Their message was clear: “All existing credit facilities—drawn or undrawn—are not affected. We will honor all obligations as committed.” To startups that were counting on that capital to fuel growth, the message was a lifeline.
The Fine Print: What Founders Should Watch Out For
Even with optimistic news, there were still some unknowns. Material Adverse Change (MAC) clauses—allowing lenders to withdraw funds if your business faces unexpected setbacks—were still in place. And with ongoing changes in ownership and organization at SVB, founders were still on high alert.
But the incident did serve to emphasize the resilience of venture debt. It recognized not only the risks but also the important role that this financing tool fills in the larger startup finance ecosystem.
More Than a Bank: SVB’s Holistic Support for Startups
SVB’s reach goes far beyond lending. Their support guides founders from the entire lifecycle, including working through early-stage metrics to preparing for growth rounds and IPOs. They help startups optimize key areas like product-market fit, unit economics, and sales quality, as well as providing meaningful investor introductions.
Take Patlytics, a startup that defends patents. Leverage SVB network and know-how, and they attracted $4.75 million in seed funding and quickly scaled to Series A, driving expansion and winning big clients. That’s SVB Managing Director Bo Ren in a nutshell: “For us, helping founders from seed to Series A is about engineering serendipity—getting them in the room with the right investors at the right time.”
Key Takeaways for Founders Looking at Venture Debt
If venture debt is in your sights, remember these considerations:
- Have strong VC backing. Good investors on your cap table lend credibility to lenders.
- Use it tactically. Consider it a runway extender or growth spark—never a substitute for equity.
- Know your terms. Pay close attention to covenants, interest rates, and payback schedules.
- Select the right partner. A seasoned lender who has experience with startups can not only offer capital, but also advice.
- Inform your board. Investor transparency with information helps to synchronize expectations and strategy.
Venture debt is not suitable for every startup, but for others with a good history and investor support, it can be a successful growth driver. And as the story of SVB shows, choosing the right partner can be paramount when navigating uncharted waters.
