One of the biggest concerns of an entrepreneur with a growing company is access to capital. In addition, he needs to ensure that the amount raised is adequate so that there are no failures along the way. To meet this demand, there are currently several financing options available on the market for startups, such as venture capital and venture debt. But do you know the difference between them?
Unlike venture capital, a modality where investors invest resources in companies with high growth potential and high profitability, venture debt is a financing option, through a non-convertible debt, for startups that do not have sufficient guarantees or cash generation to obtain traditional loans.
“Venture debt allows investors exposure to startups and businesses with high growth potential, but with lower risks and shorter return periods than investments via venture capital funds”, explains Gabriela Gonçalves, CEO of Brasil Venture Debt.
She also says that in Brazil this asset class is still new, but that in the United States this market represents around 20% to 25% of the source of funding for companies that are financed through venture capital institutions.
Another question that may arise when talking about venture debt is how it is remunerated in contrast to a traditional credit operation. Gabriela says that risk debt operations are remunerated through a fixed interest rate and a variable component linked to the success of the startup, while a traditional credit operation withdraws its remuneration solely through fixed interest rates, and that, in some cases, there may be a credit structuring fee and the offering of other services by the granting institution, such as payroll and current account, as other additional services.
“In this sense, it is worth noting that venture debt funds are remunerated by taking risk together with the entrepreneur, and that the traditional financial market seeks to minimize this component by restricting potential candidates and imposing conditions such as the requirement of real guarantees, the need for a solid financial history and a long-term relationship with the issuing institution”, she adds.
Article originally published by Startupi.