I got an interesting question from @rlucas at http://revenuebasedfinance.com/ recently about the trend toward venture debt firms doing un-sponsored deals. Un-sponsored deals are deals that don’t have a venture capital or private equity sponsor (investor) and have different risk / return characteristics as a result. His question was focused on the Pacific Northwest but has broader implications.
Some Brief History: During the eight years that I was at SVB, I had some very interesting jobs. One of which was approving all of the communications and internet related deals nationwide. If you ever get offered this very important job, I’d recommend that you pass. You’ll find that you get to know the names of all of the flight attendants in first class on United and begin to forget the first names of your children. From the vantage point of working with all of the lenders in SVB’s then 26 nationwide offices, regional patterns appeared. The Pacific Northwest in particular focused on unsponsored deals more so than the rest of the bank. When I naively asked one lender in Seattle why they didn’t do more VC-backed deals, his well-developed sense of humor reminded me that, “Dude! I’m in frigging Seattle in the rain – we (sic) ain’t gots that many VC-backed deals. You should see the ones that I reject!” Necessity is the mother of invention.
Flash Forward to Today: Venture debt comes in several different flavors today. Some firms still focus on bridging from Series A to B, a practice that has been discouraged by Fred Wilson and a host of other notable VC’s. Many venture debt firms today lend more in a mezzanine style – later stage companies that need one more financing to get to profitability or an exit. Most have $5 – 100 million in revenue and are projecting solid growth. Mezzanine lenders outside the technology sectors have gravitated to un-sponsored deals because they have better economics for the lenders and higher potential value for the entrepreneurs. Many have seen venture debt firms dabble in the unsponsored arena only to retreat to sponsored deals when their sales pipeline improves. Others actively seek unsponsored opportunities.
Implications for Entrepreneurs: Venture debt can be used very effectively for Growth Stage companies whether they are VC-backed or not. If you don’t have a venture capitalist on your board, you’ll want to makes sure that your CPA and attorney are well versed in the space. If your CFO doesn’t have the recent transaction experience to do the work, consider engaging an interim CFO firm to work on the financing. You’ll want seasoned professionals around to give you guidance. This applies to researching the reputation of the lenders as well as to the terms of the deal.