Most economies around the world depend on lending for eventual revenue generation. Depending on your business models, you will need collateral to get the attention of an investor or a lender. This means that if you are in need of venture debt, your business plan and projections wonâ€™t be enough.
Since most venture debt deals last for a few years, you need to show your lender that you really need the money. While everyone thinks about looking for venture debt capital, the smart ones are looking for ways to draw these venture capitalists to their businesses.
Venture debt has been on the rise in the past few years. This rise is associated with the fact that non-banking institutions and banks are uncomfortable with lending funds to startups. At the same time, the startups feature structures that revolve around a business model, collateral, and revenue generation. Since these determine the strengths of a business and whether they get funding or not. Startups are left out of the standard funding funnel. The only option for most of these businesses is venture debt.
With venture debt, a business pays back the debt in between two and three years and it doesnâ€™t come with collateral. Because of this accommodating system, by venture debt, there has been a rise of the same. To get the best deal, you have to come up with strategies for placing your business on top of a venture financierâ€™s list.
While there are many ways of attracting debt financing through ventures, these are the main ways of getting venture debt financiers to you.
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Identify what venture debt capitalists invest in
There are four important areas of business that venture capitalists have an interest in. These include idea generation, startup and product development, business growth, and exit or going into the public domain.
Building up your business for stability
You need to attract investors and lenders to put money into your business and to help you get out of debt. Since startups are hard-lined and canâ€™t access such resources easily, you have to find a way out of it. Be comfortable with burning cash. You also need to get comfortable with the fact that the profits will slip away in the first few years. So, learn to run your business affairs on a slim budget. A business with a high gross merchandise value fetches a higher valuation in the end.
Therefore, you shouldnâ€™t be in a rush to get funding in the form of debt financing early in the business. Your chances of landing a great debt venture financier are higher with a stable business.
According to market research and entrepreneurial experience, you get the most out of venture debt when your business is stable. Your business should be resilient to turbulence in the market, especially when starting out. The best way to show business stability is by having proof of business growth and fewer liabilities.
How do you do this?
Opportunities and ideas
Venture debt investors are not looking for any kind of business to get out of debt. These investors are looking for businesses with ideas that cause market disruption; ideas that show them that they should put their money in your business even when they donâ€™t need to own equity in your business. A stable and profitable business is easy to trust in terms of timely repayments.
Invest in a great team
The best ways of building a stable business involve getting the right people to work with. This refers to a team of professionals with the same goal as yours. For your team to work well with you, you must demonstrate good leadership skills to motivate your team members. These skills and qualities include:
- Passion – do you want your business to attain its goals while remaining positive throughout? Show your team; demonstrate a contagious excitement about the companyâ€™s vision.
- Commitment – to prove to the rest of your team that you are excited about this new project, you will need to be serious about all business activities. Invest your money and your time into the business.
- Tenacity – do you have the willpower and stamina to stay on course even when the future looks bleak?
- Teamwork – this is the most important quality needed to run your business successfully. Find ways to work effectively with the rest of your team.
- Knowledge and coachability – your richness with information about your market niche will help your business reach its potential. This also prevents getting into the wrong projects. Since there is no team that knows everything, you and your team must be coachable.
Determine your business model
What is your business model? Is it an expandable, defensive, predictable, repeatable, or a profitable business model? As you look for ways of managing your debt, youâ€™ll find that the company willing to fund your business looks at your model first. In this case, the mapping of the numbers will be crucial. Some companies offering venture debt prefer funding companies in specific industries or companies operating under specific models. You have to match their preference to attract these investors.
With a model on the table, you will know how much money you are going to spend. Having this is crucial and it facilitates decision making. If you are looking at debt consolidation companies, this information will be handy. Knowing what you have against what you owe is the first step to the right financing.
Beware of debt traps
You need to beware of debt traps all the time. These traps can easily lead to the closure of the business. To stay afloat, donâ€™t just fall for the incentive of getting venture debt without having to use collateral to access the funds.
With the rise in venture debt, a big number of investors are looking to invest in companies willing to give up a percentage of their equity in return for the money lent. Since these investors are interested in taking ownership, you may end up in losses if your business is unhealthy and underperforming.
An effective strategy for winning venture capitalists is by asking for their expertise. Yes, they have the money. But it wouldnâ€™t hurt to show them that besides their money, they will have a seat on the table offering the much-needed investment, general financial, and sectoral expertise. This strategy increases your businessâ€™ chances of growth as well.
While there are many other ways of getting financing, you may have to consider venture debt because you do not need collateral. The bigger challenge is getting the funds at the right time. The growth and successful attainment of your goals depend on how you use the funding and how you repay the money.