Venture Debt Explained: A Scout Academy Recap

Session 5 of the Flashpoint Venture Scout Academy covered venture debt, also called growth debt: what it is, how a deal is structured, when it makes sense for a startup, and what a lender looks for before saying yes. It was led by Ilja Velickis from Flashpoint's Growth Debt team, and it's written for scouts, angels and founders who want to know which companies fit this kind of capital.

What is venture debt?

Venture debt is a senior secured loan for venture-backed tech companies, usually raised alongside an equity round or soon after one. It gives a company growth capital without diluting existing shareholders, and it's repaid in cash over a few years.

The product has two parts: the loan and a warrant. The company gets cash to grow, and the lender gets interest plus a small option on the company's equity.

Ilja spent time on one point that trips founders up again and again: growth debt is a different instrument from a convertible loan, a CLA or a SAFE. Those are quasi-equity. They're meant to turn into shares. Venture debt is meant to be paid back, so the documents look like loan documents, and founders should expect that from the first call.

How is a venture debt deal structured?

A typical deal is a three to four year term loan that amortizes monthly, often with a short interest-only period at the start. Pricing usually sits in the low to mid teens, plus a one-off closing fee and a warrant.

Here's how the pieces fit together:

• Amortization: after an interest-only period (around six months is common), the company pays the loan down in equal monthly installments, a bit like a mortgage. Each payment is part interest, part principal.
• No bullet structures: paying only interest for years and then the full principal at the end carries a different risk profile, and it's outside what a growth debt lender typically offers.
• Security: most borrowers are asset-light software or service businesses, so the lender takes security over what they do have: intellectual property, receivables and bank accounts.
• Pricing: interest of roughly 10 to 14 percent, plus a closing fee of around 1 to 2 percent. The final number depends on the credit analysis for each company.

How does a warrant work in venture debt?

A warrant is an option for the lender to buy equity at a fixed price, usually the valuation of the most recent equity round. Coverage is typically 10 to 15 percent of the loan amount, so a $10 million loan might come with the right to buy $1 million to $1.5 million of shares.

The lender doesn't get those shares for free, and the loan itself never converts. If the company grows and exits at a higher valuation, the lender can exercise the option at the old strike price and sell at the new one. That's the equity kicker.

The warrant also changes the lender's incentives. A bank only earns interest and fees, so it tends to protect itself with financial covenants that can choke a fast-moving company. A venture debt lender earns more when the company grows, so it has a reason to keep restrictions light.

There are still standard non-financial covenants aimed at "leakage," meaning value leaving the company before the loan is repaid. Examples include no dividends and no M&A without consent. In practice, a reasonable lender will approve a deal that creates value.

Why do companies raise venture debt instead of equity?

The main reason is lower dilution. Debt extends runway and funds growth at a cost that stays flat as the company grows, while the cost of equity scales with every multiple of growth.

Ilja walked through a simple example with $1 million of capital:

• If the company grows 10x, $1 million of equity becomes $10 million of value. The company received $1 million in cash, so it gave away about $9 million.
• A three to four year loan costs roughly 1.3x in principal and interest. The warrant adds some upside for the lender, but it's only 10 to 15 percent of the loan.
• In the 10x case, the debt option costs around $3 million in total. That leaves roughly $7 million more value with founders and existing shareholders at exit.

Common use cases include:

• Extending runway: a company raises equity, then adds debt to double down on a growth channel it has found and reach its next round at a higher valuation.
• Topping up a round: raising part of the capital in debt instead of selling more equity.
• International expansion: funding a push into new markets.
• Asset and capex financing: companies that own a book of assets (e-bikes, consumer electronics, loan books) often outgrow small angel debt but aren't yet big enough for asset-backed lenders, who tend to start at tickets of $30 million to $50 million. Growth debt can bridge that gap.

What kind of companies qualify for venture debt?

The best fit is a VC-backed company with proven product-market fit, at least $5 million in annual revenue, solid unit economics and enough cash runway that the debt adds firepower instead of replacing equity.

The criteria Ilja covered:

• Quality VC sponsors: institutional investors who back the company and have reserves to follow on. Profitable companies are the exception, since some can't get bank debt because they lack years of audited accounts, have complex multi-country structures or don't want bank covenants.
• Revenue traction: north of $5 million in annual revenue at healthy margins. At that scale, product risk is mostly gone and the remaining risk is whether revenue can scale.
• Unit economics: an LTV to CAC ratio around 3x or better over three years shows the business model is profitable underneath. Deeper economics make it easier to see how the company could reach profitability by slowing growth.
• Cash runway: a growth debt lender is never the lender of last resort. A company running out of cash next month is a poor fit.
• Size of the loan: loan to value usually stays within 10 to 20 percent of the latest valuation, and often below 10 percent.
• Jurisdiction: the local legal framework needs to support standard debt enforcement.

Why does revenue quality matter so much to lenders?

Lenders want repeatable revenue with strong retention. Transactional, one-off revenue is a weak fit.

The logic is about downside. If customers keep coming back, the company can cut sales and marketing spend, keep most of its revenue and still repay the loan. Gross margins of 50 percent or more help for the same reason.

What happens during the venture debt investment process?

The process usually runs in three stages: a red flag screening, a deeper analysis alongside term sheet talks, and confirmatory due diligence while legal documents are drafted. An investment committee signs off at each gate.

1. Red flag screening: unit economics and historical financials come first, then the product, market, team, cap table, cash runway and any existing debt. Small unsecured or subordinated loans, such as government-backed ones, are usually fine. Large senior secured debt is harder.
2. Analysis and term sheet: a product deep dive, market and competition work, a look at go-to-market efficiency, and a three-statement financial model with base, downside and upside cases. Investor calls often happen here too.
3. Confirmatory diligence: financial checks that tie management accounts back to bank statements, an on-site workshop with the heads of key business units, and fairly light legal diligence on title, capacity and existing pledges.

The legal package has three main documents: a facility agreement, a warrant instrument and security documents. Security is simplest in the US and UK, where one document can cover all assets. In some European countries, lenders have to take security asset class by asset class, which adds time and cost.

How this helps Flashpoint scouts

Growth debt opens a different set of referrals. A company that's wrong for an equity round can be a great fit for a loan if it has $5 million or more in repeatable revenue, strong unit economics and good investors behind it.

Timing and preparation matter just as much. The strongest referrals come from companies whose board has already agreed to raise debt and whose data room is ready. Deals that move in two-month gaps between calls rarely close.

When you pitch the idea to a founder, lead with the dilution math, and be clear that this is a real loan that gets repaid. That saves everyone time later.

Learn about the Flashpoint Venture Scout Program