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Venture debt 101: Extending your startup’s runway

Nov 20, 2017

Securing and having access to financing is a key concern for emerging and high growth companies as they scale, but leveraging the right financing arrangement for your business is also of paramount importance. Venture debt can be a viable option for your business as a way to infuse money into the company without adding more shareholdings to the mix.

It’s also important to understand that venture debt should not necessarily be viewed as a substitute to equity, but instead as a complement to the latter. This presentation by Marta Rochkin, an associate in Osler’s Financial Services Group and Win Bear, Managing Director of Silicon Valley Bank, explains the importance of striking the right balance between venture debt and equity. Available in both webinar and PowerPoint format, this presentation also explains the types of debt and financing options available for emerging and high growth companies and the pros and cons to each. The goal is also to help your business navigate the following issues:

  • debt vs. equity including the differences between each type
  • primary uses of debt
  • “traditional lender” and “innovation industry leader” mentalities
  • venture debt and growth capital (debt) providers
  • key considerations in choosing a debt partner
  • venture debt parameters
  • working capital lines of credit and recurring revenue lines of credit
  • SRED financing and alternative financing


For more information, contact Marta Rochkin, Associate, Financial Services Group at or 416.862.5682.

This presentation is part of Osler’s Emerging and High Growth Companies 101 series, designed to help emerging ventures navigate through the various issues and legal requirements they will encounter throughout their growth cycle.

Video transcript

SIMON: Hi everyone. I'm Simon [INAUDIBLE] an associate here in [INAUDIBLE] group. My pleasure to welcome our two guest speakers today. We have Win Bear, Managing Director at Silicon Valley Bank, he's made his way up from Boston today, so fortunate to have him here. And Marta Rochkin, who is an associates in our financial services group, and does a lot of work with banks and a lot of work with startups as well, so she's going to be a valuable resource [INAUDIBLE]

So today we're going to be speaking about venture debt. Most startups, when you think of financing, you think of equity financing. As companies scale and have revenues, there's another option, and that's venture debt. So we're going to be covering that topic today. So with that, I'll turn it over to Win.



MARTA ROCHKIN: Welcome everybody. We will go through the presentation, there will be a Q&A at the end, but at any point that you have any questions, feel free to just interject. To the extent we can make this a conversation and make sure we're addressing any of your concerns is a priority of ours so feel free at any point to just ask any questions.

WIN BEAR: [INAUDIBLE] absolutely. I would say, let's try and make it interactive if possible and thanks to Simon, thanks to Chad, thanks to Marta for inviting me to do this. I'm assuming most companies here are Osler clients. If not, you should talk to Chad or Marta, but there's a ton of overlap with Osler's client base and Silicon Valley Bank, so they've been great partners to us, and so a pleasure to be here.

This deck, which I'll use as a loose roadmap to mostly be conversational, but try to encapsulate some of the stuff in a few slides. It's always a little difficult to calibrate, and so the intent at least is for this to be pretty high level with regards to debt-- that's the intent, at least. If it's too simple somebody jump in, let me know, tell me to advance it up a bit. Or if it's too detailed and I'm nerding out, talking about debt and banking terms, so I'm starting to sound like a banker, stop me there, too. There's nothing too simple to address in this discussion.

It's pretty simple-- I'm going to maybe give a 30 to 90 second overview on Silicon Valley Bank for those who don't know us, but I promised Chad and Marta that this is absolutely not intended to be an SVB commercial infomercial. We really want to talk about-- very objectively and agnostically about what debt options are available, from what I see, to early stage tech companies.

Key considerations, who are some of the players, who should be talked to. What form does debt take? What does it look like? And all that good stuff. But by no means is this going to be totally comprehensive or complete. In fact, Marta and I were just talking before we kicked off, like-- I recognized one pretty meaningful gap in here, and so like I'll add a couple of things in here that aren't on the slides but if any of you from your own experiences either want to call bullshit on my facts or add other ideas or options, you won't hurt my feelings one bit. So fire away, please. Anything else before we jump into it?

MARTA ROCHKIN: No, I think we can go right in.

WIN BEAR: OK. So as Simon mentions, I'm Managing Director with Silicon Valley Bank. Even though we're headquartered out in the Valley, I'm based in our Boston office and I run our Canada practice on a national level, so I'm supported by two teams. One is in Boston that helps me cover the Ontario and eastward, and then we have a team in Seattle that helps cover BC and Alberta.

For those who don't know us, we're a full service and commercial bank that is very exclusive to a certain set of industries. So we don't do retail banking, we don't do real estate, we don't do natural resources-based banking, all the stuff that traditional banks are really, really good at. That's not what we do. What we have done for 33 years is work exclusively with companies in the innovation space. And so generally that's going to be, as you can see from the slide, tech and all the niches that might encompass life sciences and health care, VC and private equity firms.

So to put that in context, probably 60% of all the VC firms in the US bank with us, and a lot of their portfolio companies also work with us. The one caveat-- so this whole innovation space rhetoric is our wine division, which we bank premium wineries on the West Coast and sadly, I've got nothing to do with that business, but if any of you are heading out there at any point and you're wine enthusiasts shoot me an email, give me a call, and if there are client vineyards you want to go see take me up on it.

So a couple of quick stats and then I'll get off the SVB-specific comments. Yeah, it's funny and Simon mentioned today, we'll talk a bit about venture debt. Venture debt is something we're very well known for, and we're the most active bank in the world in terms of venture debt, but we do far more than that on the debt and banking side. But with venture debt generally being predicated on VC backing, the two stats in the bottom middle shouldn't be a big surprise.

50% of all the VC-backed or tech and life sciences companies in the US are SVB clients, and then we have 58% of all US VC backed companies that had an IPO and tells a 16 or SVB client, so that bottom stat is, that's when everything works out beautifully, where we've got involved early with the company but grown and scaled with them and stayed with them to IPO and/or beyond.

Our clients would range from your early stage seed-backed, angel-backed companies all the way up to public companies. Again, the common thread-- one division aside-- the common thread is they're all in the innovation space. So that's just sort of a quick backdrop on SVB and maybe what makes me halfway qualified to talk about some of the stuff, but that's really the end of any SVB-specific comments I'll try to make here.

And you guys will get copies of this. There's no need for me to run through this, but just to give you a flavor of what our client base looks like, here's a sample set of some of our clients, here's a sample set of some of our Canadian clients that we're very proud of, and now let me get away from SVB.

So actually, in reading this I was a little hesitant to even title the slide Debt versus Equity 101, because as we often tell our early-stage clients we're not looking at trying to substitute for equity per se, in fact like the key is striking that right balance, and figure out how do they work well together, and debt certainly can be very complementary to whatever equity you're raising.

This again might be too simple for some but for others who aren't as familiar with debt, just quickly kind of point out what you're looking at here. On the left side-- just look at this is a simple kind of risk return type stack where debt and senior debt-- which is where we typically play-- lowest returns but lowest risk-- equity, particularly common shareholders-- highest risk but potentially the highest return.

The inverse of that, of course, is if you go-- and why is that? Well, if you go to the right side in terms of who gets paid first upon an exit, which you hope is a good exit, but even in a downside scenario who gets paid first. Well, the debt folks got to get their money back. You hope there's money left over for the shareholders, and in good situations there's the lion's share is left over for the shareholders. So that again-- kind of a simplification of debt and equity dynamic, but if there's any questions or if that doesn't make sense.

MARTA ROCHKIN: And I think one thing to point out when you're dealing with venture debt as soon as you're looking to financial institutions-- I would say 99.9% of the time they are looking to take security. I think even multi-billion dollar companies usually still have to get secured debt, so as you're looking to someone like SVB or their competitors, taking security in your collateral will be a requirement from them. Putting them, again, to the top of the charts in terms of the repayment priority.

AUDIENCE MEMBER: Are you going to talk more about [INAUDIBLE]?

WIN BEAR: Sure, yeah. That kind of jumped to that, and this isn't entirely related to that but I'll add some more detail. So again, on the debt side here, yeah it's the lowest risk with the first money to be repaid it's-- I say relatively inexpensive, because people have varying opinions on what's expensive and what isn't. But certainly compared to equity when you're looking at the cost of diluting your ownership-- debt's a hell of a lot cheaper.

To your question, the third and to Marta's point, a lien on the company's assets is pretty standard stuff whether it's us, our competitors, et cetera. And rarely, at least for early stage to growth stage companies are you going to see any kind of unsecured debt. There's exceptions to that, maybe like a credit card line or something like that. You might find some lenders, even then--

MARTA ROCHKIN: Even credit card lines or at least taking interest in your deposit accounts with them and requiring you to post a GIC or cash collateral. But it can be specific to certain types of assets, but if you're just taking out venture debt you're usually going to see it be all the company's personal property now and going forward. It's not just the property you have when you sign it but as you grow and acquire more tangible or intangible assets, it will extend to all that. Certain lenders have carveouts-- I know Silicon Valley Bank is one of them in that IP is carved out.

WIN BEAR: Usually. I mean in some cases we'll take a lien on the IP, but in general we're basically doing what's called a negative pledge on intellectual property, meaning we're not going to take a lien on your IP, we're just asking that you don't pledge that as collateral to some other lender.

So there are situations where we actually will take a lien on the IP, so it depends. I think a big-- and I'll get, in a few slides, into more quote unquote traditional lender mentality versus maybe more entrepreneur friendly lender mentality. One big difference is as we're talking about security and collateral and those kinds of things-- I know it's kind of-- particularly for traditional banks, it's not too uncommon to see in their playbook them asking for personal guarantees and things like that.

That's something we typically-- I'm not saying we've never asked for a personal guarantee, but we typically want to shy away from that. And several of our competitors would also shy away from that and the primary reason being, if I'm really relying on a personal guarantee as a long term security solution to help me feel good about doing this, I'm probably not differentiating myself a whole lot from what you can get from the big five or six up here.

MARTA ROCHKIN: As counsel, if I were representing you, I would not ever recommend personal guarantees be signed. You wouldn't want to expose yourself. We have seen situations where the guarantees are limited to the shares held in the company. In those circumstances where it's really limited only to the shares, we can get comfortable with that simply because if all the assets of the company are pledged and the bank goes to enforce-- the lender goes to enforce-- the shares are kind of meaningless anyways.

But other than that we wouldn't recommend any of our clients to take on personal liability. And we would if it's [INAUDIBLE] holding the shares, maybe the risk is minimal, but we wouldn't recommend it. And to be honest, I don't think I have-- I rarely see it. Usually, if a bank wants it they'll make up for it in taking-- charging higher interest rates or other fees to help balance some of the risk, but we definitely don't see it very often.

WIN BEAR: And I would say if you're faced with-- if you're evaluating debt scenarios from banks, non-banks, whatever, and you're being asked to provide a personal guarantee, I certainly would suggest to try and push on the requirement and if you can't make a whole lot of headway, I think at the very least you ought to try and negotiate some kind of springing or release or something. Some sort of tangible milestone that you as a company can hit just to trigger the release of that guarantee. In the very few deals we've done personal guarantees for, that's often a feature we'll put in there to let it come to earn its way out of that.

But I don't want to get too stuck on personal guarantees here. I think you see it a lot from-- you see that requirement a lot from-- just the go-to playbook from traditional banks but I think a lot of times-- within reason I feel that with traditional banks, I still think you can make a good argument for getting rid of that requirement. But I guess everybody does their stuff differently.

Primary uses of debt-- the simple ones would be you're financing specific assets, maybe you're financing recurring revenue streams, maybe you're financing non-specific growth initiatives, whether it's ramping up hires, ramping up R&D, et cetera. In some cases it could be not only financing your organic growth but also could be financing growth by acquisition. Those could be revenue stream acquisitions, those could be technology bolt-ons-- we'd certainly help finance both.

Special situations in terms of use of debt proceeds. Bridge loans, which are-- and whether it's us or anybody else that plays in space-- probably our least favorite type of lending, and probably our least frequent type of lending. It's generally limited to situations where a VC firm is asking us to do it as a favor-- to grow their company and they absolutely are committed to providing follow-on financing but maybe there's a documentation period that's-- there trying to bridge-- in those situations we'll do it. But there are others who might look at bridge scenarios, but regardless of who you do with, bridge financing, or at least the way we would define it, it's going to be the most expensive type of lending out there.

MARTA ROCHKIN: And I think if you're in the stage of wondering-- is debt financing something we should be looking into? A need for money right away isn't necessarily the trigger when you should start looking into it. If you've had some successful rounds of equity and you want to improve your liquidity and have something in your back pocket, entering into these financing arrangements-- there's not necessarily a requirement to draw in day one to start accruing interest on day one, but it could be handy to have if you need it down the line.

And shareholders may actually like it because as mentioned before, it's not diluting their interest. So it's a way to get money into the company when you may need it without adding more shareholdings to the mix. So definitely something to think about even if you're not in any upfront need for any cash.

No and that's a good point to bring up because sometimes as much as we want to do deficit lease and do deals and get them done. I mean a lot of times both parties can ultimately agree that it might not make sense. I can think of-- I won't name names, but there's one of Chad's client companies-- super hot local company, well publicized, raised from a top tier US VC-- and we've had great dialogue with the company. And ultimately, they just decided that, given the length of their current cash runway, it probably didn't make a whole lot of sense today to do debt with us.

What I hope is that we've demonstrated some value to them along the way, and when they are ready to pull the trigger on something, hopefully we're well-positioned. We already-- at least gotten some education on the story. that's I'm not going to look at a company-- if we're not truly doing something that's going to extend runway or provide cushion, we don't want to try and force feed debt on people's balance sheets so we can earn a few interest bucks. So sometimes those conversations do take a more consultative tilt. But now-- let's all go with that one I guess.

All right. So everybody's got a-- or a lot of companies at least, that I speak with-- have a bad bank story or have had a poor experience in some form or fashion. And I'm limiting this is to commercial banking-- I think all of us probably at some point has had a miserable conversation from a personal banking perspective with some bank.

But in terms of some of the bigger frustrations we hear from tech companies in particular, it's related to this traditional lender mentality that you see here. So looking at the first bullet point, you know, it's frustration around-- the traditional lending mindset is to want to see a multi-year profitable operating history. Or what's the company's operating cash flow to service debt, et cetera?

Well that's all well and good for an older, more established business, but when your primary criteria is a founder, or the way that the markets are valuing you most is based on revenue growth or some other metric other than bottom line, there's no point in covenanting debt around profitability if that's not your primary metric and how you're going to be valued.

And traditional lenders-- not all of them-- there's always exceptions, but in general they choke on that a bit. And related to that is OK fine, if they can kind of get their head around that-- a lot of times, or at least the criticism is, that too often they'll look at your balance sheet and try and figure out from a collateral liquidation standpoint how much could they recoup. And then the obvious frustration for tech companies is you got a lender looking at the balance sheet looking for hard assets or fixed assets the same way they would if they're looking a mining company, and it's just completely different. Most of your value is tied up in IP or arguably, enterprise value, or the nature of your recurring revenue base, things like that.

So traditional lenders, the criticism is that they choke on that a bit because these are some of the criteria they're looking for-- hard asset value and profitability or positive cash flow. Yes, we like to think of ourselves as an innovation industry lender or an entrepreneur friendly lender, we're certainly not the only one. But the mentality that we and our peers would typically embrace would be all right, let's go at this a little differently. This is a VC backed company for example, that's raised money from OMERS Ventures or Inovi or something like that, to put it in a local context.

We know how those firms treat their portfolio companies, how they're reserved for follow-on investments, and how they treat their companies when things go a little off plan. And you're almost at--at that point we or any lender that we compete with in this kind of venture debt world-- you're really looking almost at the-- you're underwriting the investor strength and composition and the investor dynamics as much as you are the company. Management teams are critically important, technology-- critically important, historical operating performance-- we probably don't have a long history. And there are certain exceptions, and it's great if you do.

But if the early stages, you're looking at the company's ability to access capital, whether it's follow-on investment from your existing investor base-- whether it's the probability that you're going to raise capital from a reasonably well-known VC firm-- those are all things worth thinking about. And then related to that-- particularly for companies that do have-- I keep harping on recurring revenue streams. All of our companies are not SAAS companies, by the way, but we do work with a ton of those types of companies and there's enterprise value in a recurring revenue base. And that depends on things like contract lengths and churn rates and like good stuff. But we do try and get our heads around what's the enterprise value, or what's the value here? Almost like in a kind of partisan scenario, if we had to look at that to get repaid. Yes.


WIN BEAR: So say again, sorry.

AUDIENCE MEMBER: [INAUDIBLE] --raise money in the future? [INAUDIBLE]

WIN BEAR: Well, or if you've already raised capital and if you think you've raised enough to get you some point to profitability or you're pretty close, and that's where we can help bridge that gap or extend that runway, then maybe we're not looking at-- we're not expecting necessarily in that case to raise future equity. You might have enough gas in the tank to get there. It's the likelihood that if you did have to go raise additional equity to fuel for the growth, what's the probability of that? And that's what we're trying to get our head around. Does that answer your question? OK.

All right.

OK. So what are the resources-- some of the resources available to early stage tech and life sciences companies? There's already one category I've left out of here, and I'll tack in on-- you guys may know of others. But to really simplify it, I think of the competitive landscape for us and the options available to you in the following categories.

Banks-- that's a pretty easy one, especially in Canada, where there's virtually six, and in the states there's 8,000, so it's a little tougher to navigate those waters. But the banks, nonbanks, or debt funds-- debt funds being folks like Wellington or Espresso or Hercules-- is out of the states, WTI-- or Western Technologies-- you may be familiar with them-- nonbanks that provide debt financing. When I say debt fund, that's what I'm referring to.

Third, there's only a number of Fintech, or alternative lending platforms out there, and I think actually a couple of you-- if I look at the registration list, a couple of you are in here-- some of those are more B2C, but there are some B2B alternative lending platforms out there. And sometimes those can be good options for you as well.

The fourth, and one I probably should mention, that I just failed to put on a slide, would be government or government-esque type lending facilities. And I feel like I'm always learning of a new one up here but I'm thinking, feeling pricey most frequently is stuff like you FedDev or if it's over looking at a Quebec deal with something like from Investee Small Quebec or-- gosh, do you put BDC in this category or not? I guess are they considered quasi-government-- it's like you get-- there's a whole bunch of different programs all with different repayment scenarios, some like FedDev, at least in the few situations I've seen-- Marta and Chad ca-- are definitely going to have a stronger understanding than I will on this, but in some cases it's been like, almost like forgivable debt.

MARTA ROCHKIN: Or more like grants, really.

WIN BEAR: Yeah, it's structured as debt, I guess, but then nobody seems overly concerned about actually paying it back. Which makes sense-- those cases, I guess those programs are designed to foster growth and job creation, things like that. So we have fourth, I guess would be government, or grants disguised as debt. If I'm failing to mention any other, somebody let me know. I guess you also could look at convertible debt from VC firms.

MARTA ROCHKIN: Yeah, or an existing shareholders. We see that a lot-- I'm sure a lot of you have done that with my colleagues here at Osler. But definitely various types of shareholder loans.

WIN BEAR: Yep, yep, absolutely. And the reason I didn't put the shareholder loans up there is because we, and I think most of the lenders are generally speaking, going to view that the same risk mentality as equity as long as their shareholder loans are subordinated to the primary lender's security interest. In that case as long as there's no big looming repayment date that is supposed to happen before the senior debt gets repaid, most lenders will be pretty flexible with--

MARTA ROCHKIN: Yeah, most Lenders are definitely flexible, but if you have a lot of shareholder loans out there you might need to consider whether you can share-- how your shareholders are going to be comfortable with it. But I've never seen a lender actually restrict the conversion. It's usually-- there's just often restrictions on repayment.


A few considerations when choosing a debt partner-- the list could go on and on trying to distill it down to about five here. At one, and-- a lot of this is just kind of common sense, but reputation. Ask for client references. Absolutely. Ask for CEOs, CFOs, whomever, from some of their current client companies and call those folks and reach out and ask how their experiences have been.

It's always fun when you can have a conversation with a company that's actually gone through a tough period with a lender, and ask them how that particular lender behaved. Did they really put the screws to the company at the wrong time? Did they try and be reasonably good partners-- reasonably patient, or at least as patient as debt folks can be versus equity folks? Ask those types of questions. Ask about the response time. What's the client service experience been like?

All that, because taking on debt partners by no means is, I think as lofty a consideration as here you're choosing for an equity partner-- that's almost like professional marriage, almost. The debt folks-- you also don't want to take on an unproven partner. You don't want to take on a debt partner that's got a crappy reputation out there.

MARTA ROCHKIN: One thing to think about as soon as you enter into debt financing-- most of your out of the ordinary transactions will likely need to be approved by the lender. So it's really important to make sure that you have a good working relationship with them. That they see eye to eye with your business model because you don't want them-- you want to make sure that going forward you will likely need their consent on any major transaction. That they will--

WIN BEAR: Very good point.

MARTA ROCHKIN: --work with you on it. So definitely important consideration.

WIN BEAR: Yep. A very good point. Related to this would be experience and track record. Does this debt partner understand what the hell I do? Do they-- is this the first time they've worked with a tech company? Is this a new tech banking group that they just launched in the past year? Not necessarily a bad thing, but you know it's something that might-- it does give you pause-- you may just want to get a little more clarification on that and see.

Maybe that individual, even if it might be a new group at that bank, but maybe that individual has a lot of experience and that could give you some comfort. Costs, of course. Terms, what's the interest rate? If there's a warrant requirement, how dilutive is it? Are there fees? Make sure you understand all the costs and have the lender walk you through-- or your lawyer-- if they've seen plenty of that lender's term sheets-- Osler is a great example-- have them walk you through what all the costs are. And if there's questions always err on the side of asking us.

Scalability-- that's a big one. Most early stage tech companies are pretty hellbent on growth, and is this a debt partner has the stomach for growth? Is it a partner who can grow with me incrementally? So a good example would be, if it's a smallish debt fund, it might be a great near-term solution, no question.

But you also want to talk to them about-- what's the house limit? When are you guys going to get tapped out? Fine, you gave me a half million bucks today, but when I need you for five or 10 or 15, when are you going to get tapped out? Because you don't want to go through this process every year where you're changing debt partners every year because god forbid, you're growing. I mean, that's a great problem, right? So you want to ideally saddle up with a partner who can scale and grow with you.

Network is one where-- it's also a foregone conclusion that you should get competitive terms. When I go back to the costs and things like that, cheapest isn't always better but you need to get competitive terms from your debt partner. Assuming that's a foregone conclusion-- which might be a little generous-- what other intangibles does this partner bring? Are they well-connected in my particular industry sector? And by well-connected does that mean they're connected to peer companies? CEOs of other companies that I want to talk to and I want to meet with? Are they well-connected or as well-known known in certain investor circles?

Things like that where collectively, sometimes those intangibles can be really valuable to a company, and then sometimes they aren't. Some companies look at this stuff from a purely transactional perspective and that's OK too. It doesn't make them dumb, doesn't make them bad companies. Just some folks tend to value some of this intangible stuff more than others, and that there is no right or wrong way to do it.

MARTA ROCHKIN: Yeah I get asked fairly frequently taking with specific consideration to some of the legal points in these agreements. Which bank would you recommend I go to? And I think I just echo a lot of what Win said. A lot of the paper that you're going to see from Silicon Valley Bank and all their competitors is very similar.

And I would never recommend focus be put too much into, what are the covenant packages that come with this? Or what are the defaults that we need to be concerned about? Because it is quite similar across the board. What really I always recommend is the reputation in the working relationship of the banker because you will be dealing with them on an ongoing basis. And the economics of it-- is it your most cost-effective option? And those are really the things that you should focus on because other than personal guarantees that we talked about, the specific legal terms are going to be very similar as you look at all the competitors in the industry.

They've seen everyone's papers really, in terms of-- they know what their competitors are offering and they're going to offer something similar so, same except for personal guarantees or really restrictive financial covenants that you just may not be able to comply with, the focus really should be on the working relationship. The cost, and what the future opportunities look like with this partner.

WIN BEAR: Yeah, agreed. And it's like legal fees. Raise your hand if you like paying legal fees. Nobody does. Nobody likes paying banks, likes being lawyers. But if you are going to pay those fees, whatever value can you extract from this? And I'll start talking Osler infomercial, and it's not intended to be, but I'll put Chad on the spot.

You're a company up here and you're looking to raise outside capital, how many other lawyers up here can actually make a call to Vinod Khosla, or something like that in states? Not very many. He and his team can, and they've done dozens and dozens-- I forget the number of year-to-date of new equity financings for clients up here. Chad's well-known in the valley as well as up here, so, similar with your bank, or your CPA firm, or whatever kind of professional partners you're choosing, figure out what additional value you can extract out of that. You're paying for this stuff, you may as well get as much value as you can out of it.

Where are we next? So there were-- let me see here, I want to leave plenty of Q&A open if there is any. What I plan to do here is I can walk you through, if it makes sense, just a couple of things that are plain vanilla debt use cases. One would be venture debt specific, the other would pertain more to working capital lines of credit that might be recurring revenue baselines, it might be receivables baselines. I can also just pause if you want to kick around other ideas, but if a couple of simple use cases makes sense-- OK, all right.

And if you want to get into more detail on some of the stuff, please interrupt me. Some of you are going to be already pretty well-versed in this, and some of you won't be versed at all. So venture debt-- boy, that's one where a lot of folks define it differently. And our definition isn't necessarily the right one but when we think, at least at SVB of venture debt, it's predicated on a company having VC backing.

Now the caveat to that is-- having VC backing it's not a prerequisite to working with us, it's not a prerequisite to getting debt financing. But for venture debt, at least the way we're thinking of it, which is really as a supplement to-- a nondilutive or minimally dilutive supplement-- to an equity investment that you raised. Obviously then, the venture of that model is predicated on you raising equity.

Could be equity you've already raised. It could be a future round, where a good example is-- here, some of these bullets I tried to illustrate it, but not very well as it turns out-- but let's say you're targeting a $10 million Series A round. Maybe you don't have to do all that in equity. Maybe you do seven, eight in equity. Something like us layers and the rest in debt. You've gotten to your $10 million capital target, you suffered less dilution than you would have if you'd done the whole thing in equity. And then the other side of that is OK, maybe you do take all $10 million in equity. Well, maybe you want to layer in some cushion on top of that so that if you decide to pursue a couple of different angles before your next round, you've got some cushion to do that.

Or maybe by taking debt and extending your cash runway before you have to raise money, and maybe you go on the other side of some kind of value driving milestone. Could be a revenue milestone, could be a developmental milestone, it could be it could be milestones I'm not thinking of right now. But if there are things that are going to drive a company's value and venture debt can give you a little more gas in the tank to get there, sometimes it can be a beautiful thing.

And to Marta's point earlier about not force-feeding debt to people day one, with some of these credit facilities-- in some cases our companies don't end up using it. And that's all right. We look at this, and a lot of other folks look at this with a long-term view. And so sometimes doing a venture debt facility that never even gets drawn is a way for us or others to start a relationship with companies, and we're OK with that.

I mentioned runway extension, that's the term that gets used most frequently when people are contemplating venture debt. And then the other things, unforeseen things like product delays, or if you're in the life sciences world if there are regulatory approval delays, things like that-- that's when having little extra gas in the tank from a debt facility could end up being really, really valuable and prevent you from having to go out and raise more equity at a terrible time. Yes. Yeah, yeah. For sure.

AUDIENCE MEMBER: So let's say you raise [INAUDIBLE].


AUDIENCE MEMBER: How do investors feel about that? [INAUDIBLE]

WIN BEAR: Yeah. That's a very relevant question. And we never want to be in the business of pissing off investors because the problem is, we're going to work with those same investor groups across multiple companies. So it's one of those where, we generally know how most investors feel about leverage in their portfolio companies, and there are some that are adamantly opposed to it. And there or some that it's just a no-brainer. Every time they make new investment it's like they just assume that the company is going to layer in some debt from us or others--

MARTA ROCHKIN: We see it encouraged all the time, actually.


WIN BEAR: There used to be a regional distinction-- people used to criticize east coast US VCs for being so debt averse and that these west coast VCs of being a little too cavalier about it. There's probably something here-- somewhere right in the middle is probably the right place to be, right? But your question is, how do investors feel about it? I think the simple answer is you're going to get varying opinions. And then the question is how much leverage is right?

Some have crazy upsides, others don't, but I wish I could give you the one size fits all answer but there just isn't. It really depends on the nature of the VC firm, how experienced are they with-- or the angel group-- how experienced are they with using debt or leverage in the portfolio companies and if they're adamantly opposed to it, we're not going to try and go solicit their portfolio companies and piss off the investor.

Let's see here. One other, and this won't apply to all of your industries, I understand, but a handful of you, it will. Another type of debt financing that we and others use quite a bit is a recurring revenue base line of credit. So lines of credit, while we'll happily still do accounts receivable-based lines of credit and things like that-- that's a big business for us-- but proliferation of SAAS models, things like that, companies aren't necessarily-- these types of companies aren't necessarily carrying big receivables balances on their balance sheet.

So they can't finance those, but there is real value here to some of these recurring revenue streams. So if you're a SAAS company and looking to layer in some debt, this is oftentimes a pretty good way to do it. And we do a ton of this. We're certainly not the only game in town, but we do a ton of this. And if you ever want to talk specifics about-- or have questions about us or others in the space who you should talk to, I usually give folks a couple of alternatives when they're talking to us.

MARTA ROCHKIN: Yeah, maybe should we talk some SRED [INAUDIBLE]?

WIN BEAR: Yeah. Yeah. Yeah, exactly right. So SRED. I'll go over this quickly, but it is a request we get a lot from our clients up here, to help them finance their SRED claims whether that's filed or in some cases, maybe even finance their accrued SRED. How many of you actually use the SRED program here, or have used it? OK. So, all right. So most of you are well versed in this and look-- SRED financing is not something we're all pitching as a standalone product. There's plenty of boutique financiers that'll do that stuff, but we will happily do it in conjunction with another credit facility. So if you're already doing a line of credit or a venture debt facility or something else with us, and you want to do the SRED well, that's pretty easy for us to do.

MARTA ROCHKIN: Definitely there are-- if that's something you want as a standalone product-- there are tons of options who would use that as a receivable for their financing.

WIN BEAR: Yeah, absolutely. And then this is one where the landscape continues to evolve. And so a couple of you-- I think they're actually here-- if you want to opine on some of this, fire away but you're seeing more and more Fintech or alternative lending companies and platforms out there both in the states and in Canada.

And boy, there's so many that-- a lot of them we actually work with. So it's almost seems crazy that we're-- in some cases we're helping finance companies that are really trying to disrupt us, but that's just the nature of being in the innovation space, right? So as far as specific recommendations, I probably defer to Marta or Chad or anybody on their team in terms of local folks you ought to talk to if you want to explore that route.

But just know they are out there, the number of them is increasing on a monthly basis, and some, I'm sure have stellar reputations, some you may want to avoid like the plague. And I think it's where you can lean on your lawyer or your CPA or whomever can help give you some guidance there.

MARTA ROCHKIN: Yeah, and similar to SRED financing, some of these alternative financings, as you get into specific equipment financing, or receivable financing. I know Silicon Valley Bank, a lot of them are in conjunction with traditional debt facilities, but there are companies that are financial institutions that are offering this as a standalone product.

What's useful is when you're focusing on financing something very specific, it can often be a little quicker to put in place. And sometimes they don't have the same covenant package that you get with traditional financing, so it helps in the short term. It doesn't necessarily put the same restrictions on your business. The amount of financing that you're getting may be a lot less than traditional term financing or venture debt, but definitely something to consider if you have-- the big ones that jump out are really equipment financing and receivables. But if that's anything that applies to your business, it's definitely a good option to give you a little bit more liquidity on an expedited basis.

WIN BEAR: So I think we're at five 'til right now or roughly. I want to leave plenty of time for Q&A or anything like that. Yeah, please.

AUDIENCE MEMBER: Can you go through a term debt scenario? Just give me an example of--

WIN BEAR: Sure. So like a--

AUDIENCE MEMBER: Could you just go through a term debt scenario? So they get this on the recording.

WIN BEAR: Yeah, of course. This is my lame precursor-- of course every deal is unique, but to give you some rough parameters in terms of what you'll typically see out there. So if we're talking venture debt term loans, typically you're going to see-- we'll start with total term. And total term can be divided up into some kind of interest only period or interest only draw period where-- back to our conversation about not force feeding all the debt they want on your balance sheet, maybe the lender gives you some amount of time to draw it at your discretion, and at the end of that period-- whatever that is-- at amortizes over a certain period.

So we'll start with total term. You're generally going be looking at four years, maybe three years in some shorter cases, and that could be sliced and diced a few different ways. You might have no interest only period, or you might have on the front end, six months, 12 months interest only, sometimes a little longer in rare cases.


MARTA ROCHKIN: --is usually your draw period also.

WIN BEAR: Correct, correct.

MARTA ROCHKIN: So you can draw over that same time.

WIN BEAR: Correct. And then interest only period plus amortization period again, the rule of thumb is three to four years. There are-- that's typically the way of the banks that play in the space, that's the way you're going to see most of them do it. The nonbanks, because nonbanks are nonregulated-- doesn't mean they're bad, it just means they're not regulated and aren't subject to a lot of the same scrutiny that banks are-- you might see them willing to do something structurally that are a little different.

So Wellington's Playbook is doing a three year interest only type facility, where you just pay a big balloon payment at the end. Some folks really like that, others don't like paying the cost associated with that, but it's really up to you as the entrepreneur-- what's most important to you in terms of structure versus cost? And we like to try and be-- or trying to help give proposals that strike that balance and a lot of times we're successful, but sometimes we're not.

But even in those cases like the debt funds, I don't see much stuff out there for early stage tech companies that goes beyond four years, and maybe five in some rare cases. So that's the life of the loan costs. There's a whole bunch of different levers that-- or knobs that lenders will turn, and most simply, what's the interest expense? And what fees are associated with it? And then venture debt usually is going to have some kind of warrant component. And for those aren't familiar with that, a warrant is basically just a stock option. You're going to give the lender the right to purchase x shares of your stock at a predetermined price. So we'll talk about that.

Interest rates. That's-- boy, it's all over the place because again, the banks that play in this space, we're going to do it a hell of a lot cheaper not because we're good and they're bad-- our cost of capital is so much cheaper than in a debt fund that has to go out and raise outside capital and all that stuff, so that's reflected in our pricing.

So when we're looking at venture debt, you're generally looking at, probably mid single digits in terms of interest rate, the caveat there is there might be a debt fund or two you're talking to who are asking you for-- it's all in 12% to 15%, but maybe structurally they're doing some things for you that we aren't willing to do. Or maybe they are trying to use check size as a differentiator for them and in doing so they're still going to make you pay a premium or whatever they need to hit their IRR hurdles.

So again, on the high end when I look at-- including the debt funds who play in the space-- there's always exceptions, right? But in general, I'd say the high end-- what you're going to see is like mid double digits in terms of interest rate, and--

MARTA ROCHKIN: Yeah, I think I've seen recently up to 18, 19% as your-- but again, those are debt funds not banks.

WIN BEAR: But generally, we're going to get something that's coming in the mid single digits. Fees-- with any lender you're looking at an upfront commitment fee of some sort. That could-- it ranges from-- I've seen some no-fee structures too-- but mostly, a good rule of thumb would be less than a percent. So, million-dollar deal, 10 grand or less for an upfront commitment fee. Again, these are just guidelines and there's always going to be exceptions.

The warrant stuff-- that's one where you're going to see probably most variability. I see a lot of variation in the interest rates. Warrants, it depends on how much is the lender really factoring in-- potential warrant gains into their expected return on this debt facility? And instead, are they looking at it more as just as added upside.

If the company has a great exit and you get a lot of different-- you get folks on a lot of different parts of that spectrum. For example, when we're looking at warrants for your prototypical Series A venture backed company, it depends on a lot of things. It depends on the investors that they get, it depends on the companies-- again, some of these earlier things like the whole risk profile, like how accessible is future equity going to be to this company, what space are they in, are they just another me, too, or is it something that's actually really differentiated, yada, yada?

So all these things factor in, but I'd say-- and certainly size of the loan makes a big difference-- and size of loan relative to equity raise and all these things. But just in general, for back of the envelope math, probably looking at a warrant that would equate to-- on a fully diluted basis-- somewhere between a quarter of a percent to 1% of the company. 1% for us would certainly be on the high end, but then there's certain debt funds out there where I've seen them on a [INAUDIBLE] basis there, where it would equate to a few percentage points.

And again, it's not because they're-- it's not because they're bad people or just really violating usury laws or things like that, it's because they're probably doing something structurally-- that's a bit further on the risk curve, and they feel like they should be compensated for that.

Does that answer your question about the rough perameters Sorry one other thing that I should mention, because I think it's pretty standard for whether it's banks or debt funds is, from an ongoing administration perspective, how much do I, or does my CFO or my VP of finance is going to have to spend just on a monthly basis keeping that lender informed and happy and all that. And so the general requirements you are going to see as-- a lender's going to ask you for a monthly financials-- company prepared financials.

Annual, either audited or reviewed financials, typically. We're usually fine with review for companies at a much earlier stage. Once you get to a certain point, it's time to go out and pay up and get the audit. But does it make sense for super-early stage company to necessarily pay for all the financials they want? Our stance on that usually is, if their board's OK with review, we're fine with review.

And I think most lenders-- I think-- would probably echo that. And then other things like Marta alluded to earlier with various consents and things like that. Like if you're planning on making acquisitions or doing things like that, think about just the time it's going to take to get the written consent for your lender. It's something that should be turned around pretty quickly and a lot of times that does work out. Sometimes it doesn't, and that's when it can really create some animosity between companies and lenders. For the help? OK.

MARTA ROCHKIN: Are there any other questions? [INAUDIBLE]

WIN BEAR: Fire away, man. Fire away. Yeah, Louise.

LOUISE: Do you see any of the Canadian banks moving into your space aggressively, or even seriously?

WIN BEAR: Yeah, we see-- I think at some point they've all technically been in this space. I've got some-- I worked for Royal for five years in their tech banking group in the states, and that was from '02 to '07, so I've got some perspective there. They've had their KBI group for 25 years. Others have either launched for the first time or relaunched tech banking groups. I think every single one of them has done that now.


WIN BEAR: And we see that in the states too. And this happens every time-- I won't say every time in Canada, because I don't have a historical context, but I'll say it in a US context-- We see this every time tech gets hot in the states and-- tech gets hot and The Street expects banks to continue being growth stories.

They're looking for what's an easy way to do that? A lot of these banks in the states are new entrants into the market. A lot of them are viewing it as a deposit gathering exercise because your typical tech company is going to be far more-- their deposit to debt ratio is going to be like inverse of a more traditional company. And so a lot of banks who are really-- I won't say desperate for, or hellbent on deposit growth, that's a pretty good place to look.

So that's a long-winded answer. The short answer is yes. We're always seeing new competitors, we're seeing also-- you see competitors go away, too. The next downturn, which I'm not wishing a downturn for any of us-- but that's actually when we tend to pick up market share because we can't just go running for the hills, we've done this for 33 years, we're committed to tech. We don't have other business units we can run to.

And not that all of them are going to do that but it's just a lot easier if you already have a bunch of other more traditional business units in your bank. But yeah, anecdotally I'd love to hear, whether it's today or some other time, what you are hearing. I would assume most of the banks here are soliciting your-- at least meetings with you and looking to do stuff, but haven't seen enough term sheets from them yet to get a sense for what their playbooks are. And I see things spotty and my data set I think is a little too limited to really be able to say what their playbook is.

MARTA ROCHKIN: Any of the major banks in Canada do this type of financing. I think where we run into trouble and probably why they're-- one of the main reasons why they're not as popular is the big institutional banks in Canada a lot more conservative. So what they're able to offer you is just not quite as competitive as what you might get from a Silicon Valley bank or [INAUDIBLE] or some of the other debt funds.

They'll have-- that's where you may see personal guarantees come up. You'll see more financial covenants, it will just be-- I think that they just struggle to compete with what some of the other more focused lenders can do. Which is why you just don't see as much-- but yes, any single one of them will be able to lend, it just might not be on the terms that you want.


SIMON: We'll wrap it up there, it's just a couple of minutes after 1:00. We just have to get off here. So we have to thank you very much for making the trip. I guess you'll have to chug this before your flight. Thanks a lot for taking the time to be here.

WIN BEAR: Thanks for having me.

SIMON: Just a couple of administrative things on your table-- you have a feedback form. If you can just take a couple of minutes to fill those are always useful information for us that help helped make these sessions better. Also if there's other topics that you'd like us to cover, we've been pretty good about getting a range of topics over the last couple of months. But if there's certain topics that you want to see us cover, please fill that in and let us know. We're going to take a break in December-- we've got the holidays, it's usually a busy time. But we'll be back in full swing at the end of the year, so stay tuned for the next invite for our next luncheon. Thanks again.

WIN BEAR: Thank you all and also if we didn't have time to get to questions or you have debt-related questions later, my email's there, my mobile's there. I'm generally up here a couple of times a month. So I know I'm back up here next week for two or three days if you want to catch up for a coffee or something like that just shoot me an email any time or give me a call. Thanks.