Venture debt is credit extended to startups that already have institutional equity backing. Because early-stage companies rarely have the assets or cash flow that banks normally lend against, venture lenders underwrite the *investors* as much as the business: the implicit assumption is that the VCs who just funded the company will fund it again.
Typical structure
- Size: commonly 20%–35% of the most recent equity round
- Term: three to four years, often with a 6–12 month interest-only period
- Pricing: interest in the low-to-mid teens in the 2026 market, plus warrants giving the lender the right to buy equity equal to roughly 5%–15% of the loan value
- Covenants: lighter than bank debt, but material-adverse-change clauses and investor-abandonment triggers are standard
Why startups take it
Venture debt extends runway without a new valuation event. A company that raised a $10M Series A can add $3M of debt and buy an extra two or three quarters to hit the metrics that justify a strong Series B — paying interest instead of the 20%+ dilution a bridge equity round would cost. It is also used to finance predictable, asset-like spending: hardware inventory, receivables, or data-center capacity.
The failure mode
Debt does not care about your product roadmap. If growth stalls, the same instrument that extended runway becomes the thing that forces a fire sale, because principal amortization consumes the cash that operations needed. The 2022–2023 downturn — including the collapse of Silicon Valley Bank, then the largest venture lender — taught a generation of founders that venture debt is a complement to momentum, not a substitute for it.
Rule of thumb
Take venture debt when you don't need it and can borrow on good terms; it is nearly unavailable, and dangerous, once you visibly do need it.