Instrumentsventure-debt

Venture Debt

Also known as Venture Lending, Growth Debt, VC Debt

Mikael Andersson
Mikael Andersson
VC Analyst · Updated

Venture debt is senior secured debt extended to VC-backed startups, repaid primarily out of the company's ability to raise the next equity round rather than current cash flow. Loans typically carry interest in the high single digits, a maturity of 3-5 years, and warrant coverage of 0.5-2% of the borrower's equity.

In depth

Venture debt looks like a normal senior secured term loan, but the underwriting logic is upside down compared with traditional commercial lending. A bank lending to an established business underwrites cash flow: how much EBITDA the borrower throws off, and how reliable that EBITDA is across cycles. A venture debt lender lending to a Series B SaaS company underwrites the next equity round: whether the company's existing VC syndicate will write a follow-on check, and whether new investors will lead the next round.

The instrument bundles three pricing components. Cash interest in the high single digits to low teens (SOFR plus 6-9% is typical at recent benchmarks), a 1-3% origination fee paid at close, and warrant coverage that gives the lender equity upside in case the company outperforms. Hercules Capital, TriplePoint Capital, and SVB are the published methodology benchmarks; smaller specialty lenders price off the same template.

Borrowers use venture debt for runway extension and growth capex. Six to nine months of additional runway is the canonical use case. Less common but real: M&A bridge financing, working capital for inventory or receivables, and equipment financing for hardware companies. The loan does not replace equity; it stretches the time between equity rounds so the company can reach milestones at a higher valuation.

Why it matters

Venture debt is the cheapest non-dilutive capital available to a VC-backed startup, conditional on the next round happening. The all-in cost is roughly 10-12% of principal in interest plus 1-2% of fully diluted equity in warrants, which is a fraction of the dilution of an additional equity round at the same dollar amount. The conditionality is the catch: if the next round does not happen, the lender's collateral is the company's IP and accounts, and lender enforcement can force a sale at a price that wipes out equity holders.

The SVB collapse in March 2023 stressed the market for two years. Specialty lenders Hercules and TriplePoint absorbed share, premiums on new originations widened, and banks tightened minimum equity-cushion requirements before lending. By 2025-2026, terms had normalized but at modestly higher pricing than the 2020-2022 peak.

Worked example

A SaaS company closes a $20M Series B at $80M post-money. The CFO models a $5M venture debt facility from a specialty BDC to extend runway from 18 to 24 months ahead of a Series C target in 22 months.

Loan size           = $5M (25% of last round, within Carta guidance)
Interest            = SOFR + 7.5% ≈ 12.0% all-in
Origination fee     = 1.0% of principal     = $50K at close
Warrant coverage    = 6% of principal       = $300K warrant value
Implied FD dilution = warrants at last round price ≈ 0.4% of company
Maturity            = 48 months, 6-month I/O then straight-line amortization

If the Series C closes at $250M post-money in month 22, the warrants are deep in the money and the lender realizes a strong IRR. If the Series C does not close and the company sells for $30M, the lender's $5M senior claim is repaid first and equity holders absorb the rest. The asymmetry is why venture debt is described as cheap if everything goes right.

Frequently asked

How much venture debt can a startup raise?

Typical sizing is 25-35% of the most recent equity round, per Carta and SVB methodology. Lenders underwrite to the borrower's ability to raise the next round rather than current EBITDA, so the last equity check is the primary capacity input.

What does warrant coverage mean on a venture debt loan?

Warrant coverage is the dollar value of warrants the lender receives, expressed as a percentage of the loan principal. Hercules and TriplePoint methodology cites 3-20% coverage of principal as standard, translating to roughly 0.5-2% of the borrower's fully diluted equity at typical strike prices.

When should a startup avoid venture debt?

When the next equity round is uncertain. Venture debt is structurally cheap if the company raises again, but unforgivingly expensive if it does not, because the lender's collateral is the company itself. SVB recommends 12 months of organic runway before adding debt, with the debt extending another six months on top.

Who are the largest venture debt lenders?

Silicon Valley Bank (now First Citizens), Hercules Capital, TriplePoint Capital, and Trinity Capital dominate the US market. Each is a public BDC or bank that publishes methodology and balance sheet detail. Specialty funds and growth-stage private credit shops fill the rest.

Sources & further reading