Glossary · Funding instruments · Updated
Venture debt is a loan to a startup that has already raised equity, used alongside a round rather than instead of one. It dilutes very little, but it is repaid with interest and usually comes with warrants for the lender.
The lender's reasoning is not a bank's. They do not lend against assets or profitability but against a demonstrated ability to raise equity. That is why venture debt almost always follows a recent round and is out of reach before Series A.
Its main appeal is extending runway without redistributing ownership. Two million euros of venture debt costs roughly one point of dilution through the lender's warrants, where the same sum raised in equity would cost fifteen to twenty. At a company whose valuation is rising fast, the saving is considerable.
The risk mirrors the benefit exactly. Repayments fall due whether the next round happens or not, and they drain cash precisely when it is tightest. Venture debt suits companies with predictable growth, not those hoping for a turnaround.
Example: venture debt after a Series A
A company has just raised an €8M Series A and tops it up with debt financing.
| Amount borrowed | €2,000,000 |
|---|---|
| Qualifying condition | Series A closed within the last 12 months |
| Interest rate | around 10% per year |
| Term | 36 months, including 6 months interest-only |
| Warrants granted to the lender | about 1% of the company |
| Cumulative interest over the term | in the region of €300,000 |
| Total dilution | about 1% |
| Dilution of an equivalent equity round | 15% to 20% |
One point of dilution against fifteen: the trade looks obvious while growth holds. It turns badly unfavourable if the next round slips, because repayments keep falling due while you are out looking for money.
The common mistake
Using venture debt to fund a search for product-market fit. The instrument assumes a predictable trajectory; using it during exploration adds a repayment obligation at exactly the moment the outcome is least certain.
Frequently asked questions
Who can access venture debt?+
In practice, companies that have closed a Series A with recognised funds, with recurring revenue and measurable growth. The lender relies on the quality of the investors on the cap table and the demonstrated ability to raise, more than on profitability.
Is venture debt cheaper than raising equity?+
In dilution, yes, decisively: around one point against fifteen to twenty for an equivalent amount. In cash terms, no: interest and principal weigh immediately, whereas an equity round involves no cash outflow at all.
Related terms
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