Tuesday, May 01, 2007

Mark McQueen: Why You Should be in His Debt

In the midst of the venture capital decline, Wellington Fund has been going about its business, deploying tens of millions in dollar of venture debt this year to later stage startups. Venture debt allows companies with cash flow to leverage their assets for additional capital without further dilution of equity or investor interference.

While debt is never easy on the financial statements, there are advantages. Although lenders will require numerous restrictive covenants (similar to the protective provisions shareholders already require) to follow, generally venture lenders do not require board seats or other controlling roles in the business. (Secured creditors typically do not wish to control debtor operations, lest it impair their secured status under certain equitable principles.)

Venture debt should be part of any startup financing strategy, if only to keep up with the competition in the US, who are compounding their available cash in droves through debt. Some startups and startup boards still resist the concept, which puzzles me. When JAVA releases a new plugin, do you ignore it?

Maybe it's the French cuffs venture lenders favour. For some, nothing says you have left the soothing world of shareholder-contributed capital like French cuffs held together by man jewelry. But even Brad Pitt and Jude Law wear them on occasion. Chances are they'll look good on you, too.

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