Debt facilities account for upward of 30 – 50% of growth companies’ fundraising; debt financings have become ubiquitous. So it is crucial for the TechGC community to understand the debt market and have a coherent strategy in place for debt financings.
Make sure you understand what debt market you are in – comparing the debt terms a company received when it was a Series A to what it should receive when it is a Series D is not appropriate, but it happens all the time!
Also, a reminder to not just compare your debt terms to other debt terms. In the growth tech space – debt often supplements or even replaces equity rounds, so there is no need to compare the cost of debt to equity as well.
Latham has identified 4 key subgroups in the debt space: venture, structured, lower middle market, and other IP-backed. You should know which market you are in to lead to best results!
We have listed a brief synopsis of each subgroup below:
Venture: These deals are primarily reserved for early- to mid-stage companies, and the only ones structured with implicit backing. Typical company profile is a private tech company with limited assets and are often time pre-cash flow; however some may already be seeing some revenues.
Structured: These deals also tend to be reserved for private tech companies, however you will start to see more mid-to-late-stage companies, often close to a liquidity event, and are backed without implicit backing. Some companies we see are pre-cash flow, although most have some significant revenue at this juncture.
Lower middle market: These companies are mostly growth equity and PE backed with various elements of the above, but with up to US$15m to US$20m in EBITDA.
Other IP-backed: Burgeoning subgroup that serves as a catch all, this subset derives value from monetizing assets. If you are carrying patents on your books that you are thinking of monetizing, call Latham!
Largely due to a combo of wanting to not take on as much debt (leverage risk) and not wanting to have a priced round where valuation is established, structured equity (pre-IPO converts, convertible and non-convertible preferred rounds with or without redemption, holdco notes and similar instruments) have been very popular, especially in Covid times.