Claret Capital’s Brian Geraghty on debt’s role in the venture ecosystem – SCALE Newsletter
How (and why) to use venture debt
The biggest misconception about venture debt? It’s not about survival – it’s about optimizing growth.
Brian sees three scenarios where venture debt makes perfect sense:
1. The Milestone Extension
- You’ve raised equity that get you 18 months runway, but you want to extend this by a further 6-12 months.
-
Growth is good (50-70%) but slightly below plan of (80-100%)
-
You need extra firepower to hit your next milestone
2. The Valuation Bridge
When you raised at a 2021 valuation that’s tough to match today, venture debt can buy you time to grow into that valuation rather than facing a down round. This has become particularly relevant in today’s market, where many companies are finding their next round more challenging than expected.
3. The Dilution Defence
Consider this scenario: you need to raise $10M, but current valuations mean significant dilution. By splitting between equity and debt, you can preserve ownership while keeping growth on track.
“We usually come in post-Series A or B to help get a company to their next round or delay that next round so they can get better metrics and a better valuation. We also fund a lot of M&A with Venture Debt, and this can add a lot value to a business that decides to supplement organic growth with inorganic growth.”
Becoming Europe’s leading venture debt shop
What separates good venture debt from great venture debt? It’s all about partnership.
Unlike traditional lenders, they’re comfortable with loss-making businesses – about 90% of their portfolio is burning cash.
What matters is having a clear path to future equity, break-even, or exit.
Claret’s typical deal structure reflects this partnership approach:
- 4-year loans with 12 months interest-only
-
Monthly payments starting year 2
-
Small equity warrants (usually <1%)
Not every company is right for venture debt. Claret’s team looks for specific signals:
Green Flags:
-
Post-Series A with $5M+ revenue
-
Product-market fit with strong retention
-
Clear path to future equity or exit
-
Strong unit economics
-
Experienced CFO/finance function helps
Red Flags:
-
Low growth/stagnation
-
High burn rate without clear path to efficiency
-
Complex cap table with concerning terms
-
No clear future funding path
What This Means For You
If you’re a founder considering venture debt, he emphasizes some do’s and don’ts:
Do:
-
Time it alongside or shortly after equity rounds
-
Use it to extend runway to key milestones
-
Consider it as part of a mixed equity/debt round
-
Choose partners with strong founder references
Don’t:
-
Wait until you’re running out of cash
-
Take on debt when core metrics are declining
-
Ignore the cash flow impact of payments
-
Rush the partner selection process
Remember Brian’s golden rule:
Venture debt is for growth, not survival. We’re looking for companies that can raise equity but are choosing debt for strategic reasons.