Just What is Venture Debt Financing, and How Did It Start?

A Solid Standalone or a Strategic Supplement

what is venture debt financing

As a business owner focused on growing a SaaS company, you may be exploring options to get more working capital and continue your growth trajectory — or even expedite it. Whether you’ve been funding your growth since the company started or have already received VC investment, venture debt financing is a great way to obtain additional capital needed to achieve your goals.

Depending on the lender, a key differentiator for venture debt is that it can be non-dilutive — business owners don’t have to give up a portion of their equity or a board seat to get capital. SaaS businesses can borrow against recurring revenue while retaining full control over the company’s direction.

Businesses without prior VC sponsorship can use venture debt as standalone financing to skip time-consuming fundraising efforts, support operations, and continue building out their customer base. This is a favorable alternative to bank loans which require hard assets as collateral — collateral that SaaS businesses typically don’t have. Businesses with an existing VC investment can use venture debt to extend their cash runway between investment rounds, thereby helping them achieve a higher valuation while also minimizing equity dilution.

But Where Did Venture Debt Come From?

Venture debt isn’t a new concept. In fact, it began in the 1970s with equipment leasing companies offering solutions for businesses producing military and computer hardware. Collateral drove this early version of debt financing, but in the 1980s, lenders began implementing warrants and fees tied to borrowers’ success.

The venture debt financing market continued to grow alongside venture capital throughout the 80s and 90s. (It was around this time that MRK Leasing, now known as River Capital Finance, was founded as a direct lender and equipment lessor.) The industry peaked in the dot-com era with venture debt financing topping out at around $5 billion. However, a series of events that led to the Internet bubble burst in 2001 caused many venture debt financing providers to exit the market. Lenders that remained became much more conservative with significantly reduced risk appetite.

Things began to look up around 2003 when the need for venture debt began to rise and lenders became more aggressive. Unfortunately, the 2008–2009 financial crisis once again caused venture debt lenders to either cease this form of financing or become significantly more conservative. However, as the country climbed out of the recession, lenders once again became more aggressive in their approach — leading to more flexible, expanded offerings.

So What is Venture Debt Financing? It’s Your Growth Solution

And this brings us to the current day, when venture debt financing is being sought by growing businesses in all types of industries. But perhaps more than any other type, venture debt is a strategic solution for people growing a SaaS company that could experience difficulty getting a bank loan or who want to maintain as much control over the future of their business as possible.

The key for SaaS companies interested in learning more about venture debt financing is choosing the right partner. Not all lenders have the same requirements for financing, nor will they offer the same level of advisory partnership, operational guidance, or alignment with the investee’s strategy.

River SaaS Capital provides venture debt financing solutions with a partnership mindset. Each company we work with — whether you’re pre-revenue or are scaling to take your business to the next level — receives the benefit of our extensive experience and flexible funding options. If you’re a SaaS company looking to fund your future, let’s talk.