Direct Lending for Early-Stage Companies?

I know a that the direct lending market is booming, providing relatively flexible for MM businesses that would have trouble getting a bank loan underwritten.

My question is: are there BDCs or direct lenders that will provide loans to a less mature company (e.g. profitable but smaller company with high growth expectations)? If so, could anyone point me to some top firms that provide this kind of loan? Any insight or help would be greatly appreciated. Thanks in advance.

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APAE, what's your opinion? Comment below:

You will probably come across the term 'venture debt'.

Historically this has meant one of the big names that bank high-growth (read: backed by prominent venture capital firms) information technology companies choosing to extend a line of credit. Those banks are SVB, Square 1, Bridge Bank, and First Republic (seems to have made this less of a focus lately).

Their underwriting process leans heavily on relationships. They'll literally ask the board member (who they probably bank personally) from a well-known venture fund (who they bank as a firm) if the firm plans to do the company's next round. If the answer is yes, woo, you've got a venture debt term sheet.

There's also a really established cadre of venture debt funds that specialize in this and only this. They do this on less of a relationship basis and more of a quantitative assessment. WTI and Triplepoint are probably at the forefront. Other names you'll find are Bluecrest, Hercules Technology, Horizon Technology, Lighthouse, NXT Capital, Pinnacle Ventures ...

These guys are specialists and know how to dig into a business model to assess breakage points and design structural mechanisms that ensure their payback. Know going in that many are going to demand equity upside in the form of warrants; this is how they juice their IRRs. You're giving them a very attractive return through a lockbox on your revenues, and in exchange for them taking the risk on you they also receive 50-200 bps of your cap table.

Other players are Lighter Capital and Golub (who has moved to include late-stage tech startups in its broader direct lending efforts). River Saas Capital is a newer player.

Last thing I'd leave you with is to note that there are two different models for venture debt.

One is a simple LOC where the lender literally forces a date on you for when you have to draw on the funds, as well as a date when you've got to have the line fully repaid. This tends to be the banks. As you can see, this doesn't really extend your total calendar runway, it simply gives you more money to spend during the same calendar period. This tends to be most beneficial only for the companies who have proven an ability to keep fundraising from VC funds.

The second is a revenue-based financing where someone is taking a portion of your high-margin revenues and getting a healthy IRR. It works for them and for you. If you're running an 80% margin SaaS business, you're happy to retain ownership of your company by avoiding dilutive venture capital rounds, even if it means giving a lender a 35% return. The perfect fit is a sticky, high-margin, subscription-revenue-based company. The non-bank-lenders I listed above can be really agile in these instances and provide fast, flexible financing.

Done right, venture debt can help you retain higher ownership of your own business while providing you the ramp to significant revenue growth.

I am permanently behind on PMs, it's not personal.

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Mephistopheles, what's your opinion? Comment below:

Nice summary of the market, but I wouldn't say NXT is necessarily known in the venture space. They are far more of a traditional mid-market lender and focus on cash flow. There are other well-known players as well in the space including Escalate Capital, ORIX Venture Finance, Silverlake Waterman as well as some new players like Structural Capital and Level Equity's structured finance group.

JCurv, what's your opinion? Comment below:

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