I’m in an argument with someone and figured I would consult the best. I’m arguing that a pre revenue (200k) company with 30mm in cash and 13mm quarterly run rate working in the tech space could still get credit. Am i right? If so what product and guess on rate (L + 500?)
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Are there any real bankers here who would know or just college students
Already has publicly issued equity
Not a leveraged loan. There is nothing to leverage.
Equity or some sort of hybrid instrument is the most suitable.
Question best directed to someone in direct lending or a mezzanine fund. I can't say for sure, but I doubt it very much.
This seems beyond the risk tolerance of regulated banks. You can't underwrite it as a cash flow loan; there are none. Nor are there meaningful receivables or inventory to do an ABL. Plus, I can't imagine a company of this size has anything to offer a bank by way of cross sell. Why would a bank be interested?
For a non-bank lender to touch something like this, they'd need a rate that compensates for the very high likelihood a pre-revenue company goes bust - way, way over L + 500. And at that point, you'd need to structure something where the interest payments are mostly PIK instead of cash so you don't overburden a company that's already cash flow negative and cause your own demise.
@Henri Poincaré" asks the best question. Why would the company want to raise debt? The cost of capital would be very high and just add another burden they don't need. And if they're unable to raise more equity, they're already dead. These companies need patient capital, and debt isn't.
I work in leveraged lending.
There is no traditional leveraged loan market for pre-revenue companies. By definition, there is nothing to "leverage". This would be venture debt and priced much higher than L500.
No its a actual tangible item
They do this for life science companies. An example lender is oxford. Not tech.
Certain lenders do this for tech too i.e. SVB. Life sciences is just more favorable for early stage debt due to the higher potential of future equity infusions
Yes they could. Various funds and banks exists specifically to serve this sector (my bank works alongside them on some syndicated deals when they branch into the levfin sector). It would likely be a loan with a rate significantly above prime and several forms of restrictions /covenants and major liens on all assets for the lenders. Likely a loan with multiple tranches tied into milestones, but unitranche loans are definitely possible too. Tranches could be backed out of the process at the cost of higher rates and stricter covenants. Will DEFINITELY need to sweeten the deal with warrants for the banks that exercise at a liquidity event.
It is not easy to get this amount of money in debt, but given the company is supported by a strong investor syndicate, has a clearish path moving forward, and generally doesn't suck, raising early stage/venture debt financing isn't impossible.
The real question is how much debt you would want to raise? Most venture focused lenders don't necessarily like to come in and overleverage a company on their first loan, but some very expensive and aggressive debt funds might bite at this. This also wouldn't necessarily be a leveraged loan because the company isnt raising more debt and there isn't really much to leverage. However, the size of the loan could considerably raise the company's leverage ratios.
In my opinion, it seems like a very interesting space and is something I am interested in learning more about when it comes time to exit.
Remember there’s no real assets
Regarding liens on assets, I mean like various fixed assets like office space and equipment can be claimed in a default. Also for life sciences companies, higher risk lenders sometimes like to go after IP.
The idea was to not issue more equity to not dilute existing holders and goal was to cover cover one or two quarters until revenue. But this makes sense you all have been very helpful this is interesting
Nightman Cometh's comments guided my google search and I found this:
https://www.svb.com/blogs/derek-ridgley/extend-your-startups-runway-how…
tldr: yes, certain pre-revenue tech companies can raise a limited amount of debt. It still dilutes shareholders, but less so than pure equity raises.
Those warrants are expensive though but I suppose it works
I worked for one of the major tech-focused banks (SVB, Square 1, etc.) and we did senior secured financing for pre-revenue SaaS-based software companies all the time.
The analysis is primarily based on "remaining months net cash." That is, the amount of net cash that is remaining before debt exceeds total cash on hand (a pre-revenue start-up will be burning through their cash on hand). The maturity of the credit facility will be before debt is expected to exceed cash. We had a strong relationship with the VC firms that sponsor these companies, and would maintain regular dialogue with them regarding their fund and their plans to fund another round, so that the "RMNC" is effectively restarted.
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