Venture Debt

Venture debt provides loans to venture-backed companies—often secured by assets, IP, or accounts—with repayments supported by future fundraising capacity and sponsor behavior.

From an allocator perspective, venture debt is not “safe credit.” It is a hybrid exposure where downside is managed through structure, controls, and sponsor dynamics.

How allocators define Venture Debt exposure

Segmentation includes:

• Stage: early vs growth; pre-product vs scaled revenue
• Collateral: A/R vs cash vs IP (and enforceability of each)
• Sponsor quality: lead investors, reserves, historical support behavior
• Structure: covenants, warrants/equity kickers, milestones
• Portfolio construction: sector and vintage clustering risk
• Workout execution: speed to act and legal/operational playbooks

Allocator framing:
“Is repayment underwritten by real cash flows—or by sponsor willingness to fund?”

Core strategies within Venture Debt

• Runway extension loans: tied to next equity raise
• Recurring-revenue lending: backed by contracted revenue quality
• Equipment/asset-backed: clearer collateral but narrower use cases
• Structured growth debt: heavier covenants, more downside shaping

How Venture Debt fits into allocator portfolios

Used to:

• Access private-market yield with equity-linked upside (warrants)
• Diversify within private credit (with distinct risk drivers)
• Gain exposure to innovation cycles with structured downside

How allocators evaluate managers

Conviction increases when managers show:

• Sponsor mapping and “support probability” underwriting
• Tight covenants and early warning systems
• Discipline on leverage and burn-rate dynamics
• Proven recovery execution (not just low defaults in a bull cycle)
• Transparent warrant outcomes and realized performance

What slows allocator decision-making

Common blockers:

• Overreliance on benign fundraising markets
• Weak clarity on collateral enforceability (especially IP)
• High portfolio correlation to venture cycles and rates
• Underreported restructurings and amendments

Common misconceptions

• “VC backing guarantees repayment” → it only increases the chance of a bridge, not a guarantee.
• “Defaults are rare” → defaults cluster when funding windows close.
• “Warrants make it equity” → warrants help upside; they don’t fix credit losses.

Key allocator questions

• What triggers intervention and how fast do you act?
• How do you underwrite sponsor support probability?
• What happens if the next round is delayed 18 months?
• How are covenants enforced in practice?
• What’s the realized loss history by vintage?