Being in the US. is a continuous education, especially when it comes to venture capital and how it works.
Today I heard an interesting story from a friend, an entrepreneur that raised a lot of venture capital for one of his past startups. He told me a story about his experience with "VC suggestions" and "Venture debt".
His startup completed a Series B raising over $20m with some major backers. The VC investors suggested to move the company from Boston to NYC and the appointment an "experienced" CEO, sidelining the founder that was successfully running the company for about a year prior to the investment (the track record they decided to invested in).
At some point later in time, the investor appointed CEO decided to take venture debt.
For those that never heard of this term (I never heard of it before today), venture debt is financing vehicle for venture-backed companies, offered by specialized banks or lenders in order to fund working capital or capital expenses of a startup.
The venture debt banks are not loaning the startup based on its success or financial health, but against the credibility of the VC firms backing the startup. Basically these banks are betting the VCs will continue to fund the startup, past the term of the venture debt loan.
This sounds like a recipe for disaster, especially when the startup is in the red and still relies on its VC investors.
I'm learning, but I think the two takeaways from this story are:
- Run your company and don't let VCs suggest an "experienced" CEO, especially if you haven't screwed up.
- Stay away from venture debt, especially if you're still in the red.
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