Butterfi

*The Most Common Profiles of Startup Debt Financing in 2024:* For startups navigating the financial landscape, strategically using debt can unlock significant growth opportunities. Below are three of the most common ways startups are leveraging debt in 2024 to extend their cash runway, optimize equity, and fuel growth. *Runway Extension* One of the primary uses of debt financing today is to extend a startup’s runway gaining the additional time needed to reach key milestones or improve financial metrics. Whether investing in sales, product development, or operations, an extended runway provides startups with the breathing room necessary to achieve valuation-boosting goals before the next equity raise. This strategic move helps avoid raising capital prematurely at potentially lower valuations, positioning the startup for more favorable terms when the time comes. Runway extension can be achieved through debt financing alone or in combination with an equity raise. The latter is typically required when the runway is less than 6 months. *Venture Debt to Reduce Dilution* Venture debt is increasingly used in conjunction with equity rounds to optimize dilution. By securing debt alongside an equity raise, startups can boost their cash reserves while minimizing the amount of equity they surrender to investors. For example, instead of raising $10 million entirely through equity, a startup might raise $7 million in equity and $3 million in debt. This approach, called “combo round” or “hybrid round”, allows the founders to retain a larger ownership stake while still fueling growth. The use of venture debt to reduce dilution has gained popularity since 2022, especially with lower valuations in the market. *Refinancing and Bridge Financing for Growth* Refinancing existing debt while securing additional capital allows startups to reduce their overall interest burden, improve terms and flexibility, and acquire funds to accelerate growth. Startups often refinance when they seek a longer repayment period or wish to implement grace periods with interest-only payments. Similarly, bridge financing helps startups improve key performance indicators (KPIs), such as revenue growth or churn reduction, in preparation for a stronger equity raise. By using short-term debt to meet critical metrics, startups can negotiate higher valuations and attract better investor terms. Bridge financing typically has a repayment term of 12 to 24 months and is priced higher because the lender assumes more risk in the event the equity round fails or delayed. When used strategically, debt can be a powerful tool for startups to scale, preserve ownership, and achieve the financial flexibility necessary to thrive in competitive markets. #VentureDebt #2024FundingTrends #StartupFunding #StartupFinancing #RunwayExtension #StartupInvestment #BridgeLoan

When Is the Best Time to Take a Venture Loan? Traditional venture loans differ from other debt models available to tech companies, such as revenue-based lending, runway extensions, term loans, bridge loans, and credit lines, in that the timing is critical. Venture loans come with a specific window of opportunity. The best time to secure a venture loan is ASAP following raising equity funding. At this stage, your financial position is strong (better runway, stronger cap table), your business is re-approved by professional investors and often case your startup’s valuation and projections are fresh, allowing you to negotiate better terms. Venture loans can complement equity funds, reducing ownership dilution and softening the overall impact of fundraising on your cap table. Accessible mainly to VC- or PE-backed startups, venture loans offer key advantages: ??Long-term repayment: 3-5 years. ??Favorable interest rates and terms. ??High flexibility: No financial covenants or early amortization. Despite these benefits, many founders delay seeking venture loans after equity funding. This is a strategic mistake. These days, around 85% of venture loans providers avoid financing startups whose last equity round was over 12 months ago, many of them even require maximum 6 months between the equity round and the debt financing. The market has changed in recent years and today acting early is essential, as timing directly impacts your chances of securing a venture loan. Butterfi works with dozens of venture lenders, each with specific preferences based on revenue size, business model, sector, geography, growth rates, profitability, customers base and other financial and KPI metrics. Preparation is as crucial as timing. Ensure your financial metrics, projections, cash flows and growth story are compelling to lenders while closing your equity round or immediately after. By aligning your venture debt strategy with equity fundraising, you can secure vital funding with minimal dilution, giving your business the momentum it?needs?to?scale. *Important to keep in mind that those timeframes requirement are specific for venture loans and do not apply to other types of debt financing for startups* #VentureLoans #startupFunding #VentureCapital #FundingRound #EquityRound

The New Trends in Tech Financing - Venture debt and other debt financing solutions for tech companies have gained significant traction as a financing option for startups in recent years, offering an attractive alternative to traditional equity financing. This type of debt provides startups with capital without requiring them to give up ownership, making it particularly appealing to founders looking to maintain control of their companies. Main Drivers of the Debt-for-Tech boom: Equity Preservation: Venture debt allows startups to raise capital without diluting their ownership. This is especially important for founders who want to retain control and avoid giving up significant equity in early funding rounds. Cost Efficiency: Venture debt typically involves lower costs than equity financing. Interest rates on these loans tend to be more affordable than the cost of issuing new shares, making it a cost-effective option for startups looking to preserve resources, in particular in the current environment of down-round risk. Speed of Funding: Venture debt offers faster access to capital compared to the lengthy process of raising equity. With fewer due diligence requirements and less complexity, startups can quickly secure the funds they need for growth and operations. Changing Market Conditions: The demand for venture debt is rising as venture capital funding becomes more selective. As equity investors tighten their criteria, startups turn to debt financing to maintain growth and extend their operational runway. Greater Awareness: As venture debt becomes more popular, more startups are exploring it as a viable financing strategy, drawn to its advantages of flexibility and non-dilution. Experts in the space, like Butterfi, are helping tech companies cherry-pick the most relevant lenders, among hundreds of potential debt providers. As venture debt grows in popularity, more lenders are entering the market. This increased competition leads to more favorable terms for startups. At the same time, with demand surging, lenders are becoming more selective, focusing only on startups that align with their risk profiles and credit criteria. This creates challenges for startups, which must navigate an increasingly selective and complex landscape to secure financing. #Debt4Tech #VentureDebt #Venturefinancing #VentureCapital #PrivateCredit #Debtfinancing #Techfunding

The KPIs which tech companies should note before talking with tech lenders: Today, there are various models of non-recourse financing available for technology companies, from revenue-based financing, venture lending and different types of credit lines to factoring, inventory financing, bridge loans, and many more. Each model relies on different sets of parameters, but some key metrics are crucial for all lenders: 1. Revenue Size and trends – In many debt underwriting models, the potential loan amount is often a direct derivative of the company's revenue size. Ultimately, the debt needs to be repaid, and solid revenues are the most reliable source for repayment. 2. Sponsor – To secure the repayment of the debt, some lending models, such as venture lending, rely on future equity injections into the company. Venture lenders, therefore, look for strong venture capital firms on the cap table or leading the upcoming equity round. Current shareholders also play a role in predicting a company’s ability to raise future equity. 3. Revenue Model – The revenue model is a critical factor in the underwriting process. Lenders value predictable revenues, which help assess the ability to payback. Subscription models, recurring revenues, and strong retention rates are particularly attractive. While many lenders prefer B2B SaaS companies, others focus on B2C or transactional revenue models. Some lenders prefer diversified large customer bases, but others are comfortable underwriting contracted revenues from a few large clients. 4. Runway – Lenders typically take on lower risk and seek lower returns than equity investors. Insolvency risk, especially in cases where no additional equity capital is feasible, is outside the scope of most institutional lenders. Typical lenders require a minimum runway of 9-12 months before making an investment. However, for short-term loans, several specific lenders may accept a shorter runway of 3-6 months. 5. Outstanding Debt – The repayment schedule of existing debt, including amortization and interest payments, is a critical factor. Most lenders therefore avoid over-leveraged companies because (a) it raises concerns about the ability to repay, and (b) many lenders seek senior creditor rights, unwilling to share those rights with other lenders. However, there are dozens of tech lenders that are willing to take more risk and extend junior loans (second position) or work pari-passu (equal positions) with other lenders. In addition to these key parameters, lenders carefully examine numerous other ratios and KPIs. Understanding your own debt fundability potential and familiarizing yourself with the credit criteria of potential lenders is essential to avoid wasting time in the debt-shopping process. Such process can take long time and end up with no results, if not structured and focused on the right direction from the initial screening stage. #venturedebt #techinvestment #alternativefinance #debtfinancing #growthcapital

The Short Runway Dilemma and Debt-Equity Solutions: Many startups today face a short runway while trying to raise funds. Even after minimizing expenses, their cash balance only covers 6-9 months. Raising equity in these circumstances is challenging. Some investors may exploit the situation, offering aggressive terms with high dilution or recapitalization. Others invest only alongside existing shareholders, interpreting a lack of shareholder participation as a lack of confidence in the business or team. Raising debt is also difficult. Most lenders are wary of short-term insolvency risks, as they are "low risk – low reward" players compared to equity investors. Debt providers also seek the participation of existing shareholders before committing, especially when the company is nearly out of cash. *The Aggressive Solution: Short-Term Financing* Some debt funds can support short-runway companies, but this comes with significant drawbacks. These funds often have aggressive pricing and are very selective, choosing companies with a high certainty of resilience. The chances of closing such deals are low without a sponsor’s guarantee. *The Popular Solution: The Hybrid Approach* A hybrid solution, combining some equity investment with debt, often resolves short runway issues. The equity and debt funds can come from the same investor (rare among funds but more common in the case of family offices) or separately - one for debt and the other for equity. According to Butterfi's statistics, the hybrid solution is the most common solution in 2024 among the short-runway startups. In this way debt providers are reassured by increased liquidity and improved runway, along with the confidence that the company has passed due diligence by equity players. Equity investors, including new and existing shareholders, benefit because the additional debt extends the runway without diluting equity and reduces insolvency risk. Founders and management are pleased as the company survives a serious financial challenge and can continue?to?grow. #venturedebt #techfinancing #techfunding #techfunding #venturelending

We often meet founders who believe that raising all types of capital is a similar process. However, raising equity and raising debt are completely different and require distinct skill sets. One key difference lies in the investment criteria of equity and debt investors. Equity investors are primarily interested in the future potential of a startup, while debt investors focus on past and present financials and KPIs to assess credit risk. Equity investors are drawn to the upside potential, while debt investors analyze the numbers to evaluate the downside scenario. Moreover, the expertise needed for screening and selecting investors differs between equity and debt rounds. In equity rounds, the task is fairly simple: for example, if you are a US cybersecurity company raising a Series A round, you would seek US investors specializing in this type of business and stage. Identifying the right debt investors for your startup is more complex. It requires a deep understanding of various debt schemes and investment criteria across dozens of parameters. Each debt provider has different criteria, often referred to as “Credit Box.” Another difference lies in the data sets required for each type of fundraising. In an equity round, a standard data room includes information regarding the founders and team, technology, addressable market size, customers and competition. However, there is no standard data room for debt raising. Depending on their financing schemes and underwriting, different debt providers focus on various sets of KPIs and financial results. Based on its Credit Box each debt provider zooms in on different areas of your financial and operational data. Furthermore, the time frames for equity and debt rounds differ significantly. Equity rounds typically take today 9-18 months, while debt rounds are much faster, usually lasting 2-4 months. It is crucial for startups to be prepared for these differences to effectively navigate the fundraising landscape and consult with experts if necessary. #venturedebt #startupfunding #venturefinance #techfunding #growthcapital

Venture Debt Solutions

The debt market for tech companies is thriving. Hundreds of lenders have ample liquidity and are handling an enormous deal flow. While they are active, they have become much more selective. Do you know which lender is right for your company? Talk to us, and we will find the best capital for you. ??

When discussing non-dilutive financing with startups, we are often asked how to identify the most suitable debt providers for their company profile and specific financial needs. The short answer is: “it’s complicated.” Debt market is much more fragmented than the equity market. There are hundreds of debt providers for startups, each with its own unique investment criteria, often referred to as a "credit box." These credit boxes consist of various metrics and financial ratios, including revenue size, revenue models, gross margin, growth rate, marketing spend, burn rate, cap table, unit economics, retention, geographic/industry focus, customer concentration, runway, and many more parameters. Understanding the metrics and requirements of each lender is essential to making a wise selection and successfully closing a deal. For several years, we have been developing the Butterfi platform to address this complexity. By closely working with most of the leading US credit providers (about 100 debt funds and tech banks), we have gained detailed knowledge of their exact credit criteria across 50 different parameters. This allows us to precisely approach the right provider(s) for each startup and efficiently secure financing on more favorable terms and within a much shorter?time?frame. It's all about connecting the right data points. #venturelending #techfinancing #creditbox #venturedebt