Venture lending is a flexible, lower-cost form of capital for private, VC-backed technology companies. It is typically in the form of a loan with a contractual return component and attached equity securities such as warrants to buy common or preferred stock. Companies utilize venture debt alongside and in between equity rounds to help minimize dilution, lower the overall cost of capital, and help provide flexibility around the timing and size of subsequent equity rounds.

Most venture lenders focus on investing debt in VC-backed companies that have already raised institutional equity rounds from one or more venture capital firms. In general firms are looking to identify high-quality technology companies in interesting industries with an overall credit profile that can support repayment of the loan and the potential for equity upside that can enhance returns. Each venture debt firm has its own unique preferences and characteristics that they look for in underwriting prospective companies, which varies by stage and industry, but general criteria can include the quality of VC-backed syndicate, valuable or defensible technology or IP, predictable and repeatable business models, an established and referenceable customer base, demonstrated commercial success, growing revenue or sales, long cash runways, limited total indebtedness, and a constructive overall setup.

Venture lenders typically look to avoid companies that are perceived to have binary risk points, short cash runways, high burn rates, high overall levels of indebtedness, technology or industries at risk of obsolescence, flat or declining revenue or growth rates, or limited ongoing support from existing investors.

For early-stage companies, VC-backed sponsorship is critical to the underwriting criteria of most venture lenders because its speaks to the quality of the company, leadership and governance at the board-level, and capacity to continue to support the business with additional equity rounds over time. Many venture lenders look to the quality of the venture capital syndicate as an important signal that improves the probability or raising subsequent equity as a source of repayment as well as the potential to complete an M&A or IPO event that can drive equity gains. Many venture lenders in fact have particular VC firms that they work with repeatedly over the course of their careers, building relationships that make it easier to identify qualified opportunities and manage investments over time.

At the venture growth ($5M+ revenue) or later-stages of development ($10M+ revenue), some venture lenders may be more open to companies with non-traditional VC sponsorship, but most prefer to invest alongside a high-quality VC syndicate even at the late-stage. As companies move further into the later-stage lenders tend to focus more on the enterprise value of the business and capacity of the company to achieve breakeven or profitability over time - and ultimately to complete an exit.

Of course, there are exceptions and each situation is unique - some high quality well-known CEO/founders with repeat success, or companies with especially valuable and differentiated technology have raised venture debt independent of traditional VC support. But for the most part venture lending looks to be part of the VC-backed ecosystem.