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Will the enterprise market spend significant IT budget on Windows Vista in 2007?



Make your precious equity dollars go farther - think about leveraging venture debt
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High Tech Start Up
Impact On Balance Sheet
$ In Millions

  2003 2004 2005 Total
Equity Financing 8.8 10.0 20.0 38.8
Capex (Debt) 1.6 2.4 3.7 7.8
Total Financing 10.4 12.4 23.7 46.6
Capex: Equity 18% 24% 19% 20%

High Tech Start Up
ROI Analysis Comparison At Exit
With and Without Venture Debt

  With Without
Total Equity Financings $39 $47
Insider's Ownership 30% 25%
Insider's Worth $90 $75

Source: VentureNavigation

Choosing a venture debt partner
When considering venture debt financing, it is important to ask key questions that will determine if the provider is going to offer you the flexibility and resources needed to help finance growth of your software company. Important questions include:

Is the lender really offering you cash runway? Or do they require cash balances equal to the amount your borrowing? Will most of the loan be paid back before you run out of cash? It’s important to examine exactly what the lender is offering. If the deal comes with too many restrictions, chances are you need a more flexible partner that will work with you to structure a deal that accommodates your company’s specific needs.

Does the lender have a track record of supporting its companies through various market cycles? Every startup has hiccups. I was an executive vice president in two venture-backed startups. Both were sold successfully to public companies. Both needed debt restructurings along the way. It can happen to the most promising of companies. Ask your lender for case studies or referrals where they’ve demonstrated an “investor's mentality” of supporting its companies through various market conditions.

If the lender is a bank, is it their ultimate goal to help you achieve market success or is it to grow you into a traditional commercial credit customer? Beware of the limitations of commercial banks that claim to offer venture debt type structures. Often times, they will finance an initial deal, but their goal is grow you into a commercial credit customer. Plus, they are burdened with heavy regulations that make it difficult to offer the kind of flexibility that startups often require.

Does the provider understand your market and your requirements for success? While venture lenders don’t take board seats and offer the same level of day-to-day guidance companies as venture equity investors, it is critical not to underestimate the importance of the partner with whom you'll be working. The better he or she understands your business and the market you are playing in, the less likely they are to view your success or promise based on a set of financial ratios.

Anurag Chandra is a managing director with Lighthouse Capital Partners. His area of investment focus is in enterprise computing, encompassing software and enterprise networking. Chandra previously held senior positions with Intraspect Software (acquired by Vignette) and netDialog, (acquired by Kana Communications). Lighthouse Capital Partners (LCP) is a leading venture firm focused on venture debt with investing offices in Menlo Park, Calif. and Cambridge, Mass. Lighthouse invests capital in the form of secured loans to early- and expansion-stage technology and life science companies that have received equity financing from top-tier venture capital firms. For article feedback, contact Anurag at: anurag@lcpartners.com.


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