That’s more flexible in the way the companies can use the funds, but obviously involves less upside potential than a venture debt loan for the bank. Later, if the company is more mature and has steady recurring revenues - but not necessarily profitable yet - then banks might offer an overdraft facility. Learn more about venture debt for startups. So for example, if the company is in, say, year two or three, and it doesn't have a huge amount of revenue yet (but still a solid proof of concept), the banks usually start with a product like venture debt, which means that they also have an upside potential (often called a “kicker”). And they also offer different products depending on the startup in question. These kinds of banks are usually a bit more expensive - with higher interest rates. Most importantly, they try to really understand the potential of the company for the future, and then finance the company if there's a strategic fit. They look at the market, the team, and certain performance KPIs, and do proper due diligence. And the difference here is that they tend to analyze companies in the same way as venture capital funds. But modern tech companies aren’t (yet) “typical,” and the banks have less experience in dealing with them.Īs a result, there are a few banks aiming their services at tech startups. They use historical data to rate companies. Traditional banks also tend to have a very scalable sales approach, based on experience in the typical economy. Loans make more sense for banks later in the startup lifecycle, when there’s revenue coming in and potentially assets in the business. And when you have little collateral to offer, most banks just don’t see it as worthwhile to get involved. But they risk a lot, because early-stage startups often fail. They receive a limited upside - the interest paid on the loan. This is mainly because banks don’t gain a lot from startups. Traditional banks usually step in much later than venture capitalists, venture debt funds, or technology startup banks would. This will typically also involve collateral on your part - something that the bank can keep if you fail to repay on time or in full.īut perhaps more important than what is a loan, is when they make sense for startups. A bank gives you money up front, which you pay back with interest. I’m sure that everyone reading essentially understands how loans work. So we used several different financing tools to finance a company, which is really the point of this whole article series.īut enough about my background, let’s talk about loans. It was venture capital-financed, but we employed debt instruments and grant loans too. I’ve recently left to pursue other adventures, but I am very happy to share some of my experiences with you about venture banking.īefore joining the bank, I co-founded my own startup in 2014. Nonetheless, the entrepreneurial journey never stops. And above all that, investing alongside the brightest minds from the venture capital industry is like drinking from a fire hose. I met fantastic teams, packed with innovative technology in various markets. I’m a passionate entrepreneur, and this was a great opportunity for a startup enthusiast to learn really fast not only about venture banking or fund financing, but especially about a huge number of thriving startups. I was heading the strategy and business development department, as well as the fund banking activities of the bank. In the recent past, I had the great opportunity to take a deep dive into the world of venture banking at Deutsche Handelsbank as their SVP. Furthermore, you can find offerings like banking-as-a-service (BaaS) for fintech startups, or just basic payment transaction services. They actually back venture capital or private equity funds with debt solutions to make their investment operations work more efficiently. You’ll find venture debt, but also working capital financing, overdraft facilities, and term loans - basically everything you might expect from a bank, but with a clear focus on fast-growing startups. Over time, they’ve been able to do this in various ways. In short, they offer debt funding to drive company growth. They basically provide venture banking - everything that relates to the financial challenges startups have. There are several dedicated banks in the market offering debt financing for growth startups, like Deutsche Handelsbank, European Investment Bank, NIBC, and Silicon Valley Bank (to name just a few).
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