![](\"https:\/\/tctechcrunch2011.files.wordpress.com\/2017\/03\/ball-chain.png?w=738\")
<\/p>\n<\/p>\n
Venture debt has been much in the news lately. Earlier this month, for example, we learned that ModCloth<\/a>, an online company that sells vintage women\u2019s apparel, is being acquired<\/a> by Jet.com for less than investors poured into the company\u00a0\u2014 largely because ModCloth was tripped up<\/a> by unsecured bank debt.\u00a0More recently,\u00a0we learned that after failing to land an investor or buyer,\u00a0the\u00a0music streaming service SoundCloud decided to raise a $70 million debt round.<\/a><\/p>\n Are desperate times beginning to call for desperate measures? That might be an overstatement. At the same time, the\u00a0venture debt firm Western Technology Investment<\/a>\u00a0has seen plenty of cycles and amassed plenty of data\u00a0over its 37 years in the business, and CEO Maurice Werdegar\u00a0says the firm just finished its busiest quarter ever.<\/p>\n We talked with him late last week in a chat that\u2019s been edited for length.<\/p>\n TC: It seems like venture debt is popping up in more deals. True or not true?<\/strong><\/p>\n MW: The\u00a0long trend is definitely that venture debt continues to play a moderately increasing role. The role it\u2019s intended\u00a0to play is to complement a company\u2019s\u00a0equity strategy\u00a0\u2014 to help extend [funding] from one round to the next, adding time and giving companies and their teams\u00a0the optionality of having more data and reaching certain inflection points before\u00a0heading into that next round.<\/p>\n TC: And you\u2019ve traditionally focused on early-stage companies as a result. You provided debt to Jet.com as part of its\u00a0massive Series A<\/a> round, for example. But it seems like later-stage companies are using more debt, too.<\/strong><\/p>\n MW: We\u2019ve been very busy in late-stage rounds, too. I think people raise a little too little capital; they underestimate\u00a0how long it will take to raise their next round, so debt has become an interesting supplement to that.<\/p>\n TC: Are you seeing an uptick in the number of older companies knocking on your door?<\/strong><\/p>\n MW: We can\u2019t get all the deals coming to us [there are so many]. Of course, there\u2019s always the adverse selection question that goes hand-in-hand with that demand: Are you getting the call because\u00a0things aren\u2019t going well or are these companies that are trying to be more thoughtful and strategic and proactive about their fundraising?<\/p>\n TC: Can you name names or sectors?<\/strong><\/p>\n MW: It\u2019s just a giant pool of companies. If you think of the 30 most important companies over the last fifteen years, we visited with more than 20 percent of them. It\u2019s a core part of the way that companies think about optionality.<\/p>\n TC: What do you make of this SoundCloud deal?<\/strong><\/p>\n MW: The lenders in that [deal] are\u00a0counting on SoundCloud\u2019s enterprise value being enough to cover its debt [as collateral].\u00a0That wouldn\u2019t be a bet that I\u2019d necessarily be as comfortable with. Things that can wrong and collateral can be worth less than you think. When things fail, they fail badly. Companies\u00a0just go out of business.\u00a0They can definitely go to zero in this industry. I\u2019ve never met with\u00a0SoundCloud and I\u2019m not saying anything about the\u00a0company specifically, but\u00a0the idea of being the last-resort stop is dangerous.<\/p>\n TC:\u00a0Your\u00a0industry is known for taking money back when it gets nervous. Do you think founders fully understand how covenants<\/a> work?<\/strong><\/p>\n MW: We don\u2019t take covenants, actually. Other approaches [from other debt lenders] are to take more risk but to be able to get their cash back if they are nervous. So they monitor companies\u2019 performance and if they\u2019re nervous, they can either force VCs to put in more money or get their money back. It\u2019s a little like\u00a0the insurance policy that doesn\u2019t work when you\u2019re in an\u00a0accident.<\/p>\n [Silicon Valley Bank]\u2019s debt is very inexpensive, for example, but it comes wth covenants. We\u2019re on the more expensive side, but it\u2019s more like equity.\u00a0We\u2019re pretty open about the fact that we\u2019ve\u00a0lost money more than 100 times, and by the way, we always see the trouble coming.<\/p>\n TC: Is more trouble coming now, broadly speaking?<\/strong><\/p>\n MW: Everyone needs to grow into their valuations, and that\u2019s not easy to do if you raised in 2015, which was the high water mark in a lot of rounds. So I\u2019d say instead that a lot of insiders are looking at debt as complementary, to make each round\u00a0last longer. You can only do so many inside rounds before insiders get tired.<\/p>\n TC: So it does sound like you\u2019re seeing more older startups.<\/strong><\/p>\n MW: We\u2019re having most active quarter in our 37 year history \u2014 period.\u00a0Is there an uptick in older companies? Yes, but they feel like healthy companies that are nearing profitability [and they\u2019re coming to us for a variety of reasons]. Their investors might be tired. They might not like the valuation they\u2019d get if they were to head out right now. They might want to wait on a strategic [investor or acquirer] to get a better price. \u00a0They might be wanting to make an acquisition and to use venture debt for that.<\/p>\n They might also be looking to refinance other venture debt. In some cases, lenders won\u2019t renegotiate, so companies are looking for other ways to [stretch out their funding]. It\u2019s not unlike refinancing your home to get a lower payment.<\/p>\n TC: How can founders be sure they\u2019re striking the best deal when it comes to venture debt?<\/strong><\/p>\n MW: Different lenders take different approaches, some with hidden covenants and clauses, but I\u2019d say it\u2019s their law firm\u2019s job to advise them. They\u2019ve seen every lender 50 times so should be able to advise on what these different deals mean.<\/p>\n TC: How big is this market right now?<\/strong><\/p>\n MW: There are around\u00a018 venture debt players; it\u2019s a\u00a0very robust market. We represent about 10 percent of the venture market, if you were to market size it. So if you read that startups raised $20 billion last year, then that probably includes about $2 billion of venture debt.<\/p>\n Featured Image: Bryce Durbin\/TechCrunch<\/small><\/p>\n","protected":false},"excerpt":{"rendered":"![\"\"](\"https:\/\/tctechcrunch2011.files.wordpress.com\/2017\/03\/ball-chain.png?w=680\")
Venture debt has been much in the news lately. Earlier this month, for example, we learned that ModCloth, an online company that sells vintage women’s apparel, is being acquired by Jet.com for less than investors poured into the company\u00a0— largely because ModCloth was tripped up by unsecured bank debt.\u00a0More recently,\u00a0we learned that after failing to land an investor or… Read More<\/a><\/p>\n\n<\/img><\/a>
<\/img><\/a>
<\/img><\/a>
<\/img><\/a>
<\/img><\/a>
<\/img><\/a>\n<\/div>\n
<\/p>\n","protected":false},"author":5817,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[25],"tags":[59,66,26],"class_list":["post-336995","post","type-post","status-publish","format-standard","hentry","category-technology","tag-media","tag-techcrunch","tag-technology"],"_links":{"self":[{"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/posts\/336995","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/users\/5817"}],"replies":[{"embeddable":true,"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/comments?post=336995"}],"version-history":[{"count":0,"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/posts\/336995\/revisions"}],"wp:attachment":[{"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/media?parent=336995"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/categories?post=336995"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/people.utm.my\/asmawisham\/wp-json\/wp\/v2\/tags?post=336995"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}