More venture-backed companies looking to venture debt to extend 'Cash runway'
Boston Business Journal by Taryn Plumb, Special to the JournalFriday, July 27, 2012
As a means to access capital without diluting equity or further burdening investors, more local venture-backed companies are turning to — or at least exploring — the option of venture debt.
“It’s a very practical and pragmatic use of debt,” said Gerald Michaud, president of Connecticut-based Horizon Technology Finance Corp., which has provided upwards of $850 million in venture loan commitments to more than 130 companies across the country since 2004. “It is becoming a more accepted tool in the toolbox of venture capitalists.”
How it works: instead of giving up equity, startups and growth companies receive relatively short-term loans to fund capital expenses and working capital.
It’s a concept that’s been around for decades, but is now starting to gain major traction, according to the industry, due to a softer market for mergers and acquisitions, a limited IPO appetite and reduced venture capital supply. Also, noted Michaud, it’s a quicker way to access capital without further diluting equity, but while still maintaining the flexibility of equity.
Among the local venture-backed companies that have recently received venture debt include Open Mile, Boston-based online freight brokerage service, which closed on a $3 million loan from NXT Capital Venture Finance in March, and digital commerce service company Optaros of Boston, which closed on a $2.5 million loan from Horizon the same month.
Loans are used to fund a variety of growth initiatives, according to Jan Haas, senior managing director of NXT Capital Venture Finance, which has six employees based in its Wakefield office. Those initiatives can include making acquisitions, providing liquidity to older investors or investing in sales and marketing, product development, equipment or facilities, Haas said. For early-stage companies, he said, it’s essentially a way to extend the “cash runway” to get over the milestones to success.
Ultimately, terms vary based on the company — but generally range from 24 to 48 months, according to Horizon and NXT. And the dollar amount of the investments cover just as wide a swath: anywhere from $1 million or $2 million to $20 million to $25 million per deal, the firms said. Interest rates, similarly, vary based on risk and valuation, fall between 9 and 13 percent, and often provide warrants to the lender, or the right to buy stock in the company at a certain price.
Horizon, which focuses on emerging technologies, cleantech industries, life sciences, and health care information and services, has provided $180 million in the form of 32 loans to companies throughout Massachusetts and New Hampshire to date.
NXT, which launched in October in Massachusetts with the merger of NXT Capital and Velocity Financial Group, has a goal to invest between $100 million and $200 million a year in later-stage companies in technology and life sciences, according to Haas.
“We’re investing based on our belief that companies have intrinsic value that supports our debt,” he said. “It’s largely predicated on who the investors are, who the entrepreneurs are, and do we believe in the market opportunity.”
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