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Jason Lemkin

I wonder about the value of venture lending at least since 2000 or so.

My experiences in my last two companies suggest limited value. Also, my Ec 101 view of venture lending suggest that they can really only afford to lend to very low risk start-ups, b/c their returns are not THAT great. They simply cannot afford to take substantial risk. So these days many seem to only want to lend to companies who don't really need the money.

Further, many of the leasing companies simply invoke their covenants when things get at all uncomfortable. Perhaps as well they should. But in my experience this means you may not be able to draw down on as much of the instrument as you expected -- or at least when you want to. For example, b/c the implicit interest rates are SO high on these loans (when you consider orgination fees, exit fees, buy back fees, administration fees, etc.), you may want to drawn down as late in the line as possible. The lendors tend to get squeemish here when you have 18 months of runway these days. One reaction is shorter terms (e.g., 24-30 months), which makes these expensive lines even less valuable.

In my most recent company, when we rec'd our venture financing, we had about 24 months of runway. After talking with all the usual suspects, it became clear equipment financing (apart from Dell's) made no sense. It was cheaper to fund the equipment with the very expensive equity dollars we had raised. Most lenders for equipment especially wanted to lend on a 24-30 month schedule at total interest rates which I think were at least 15-18% when you added in all the explicit & hidden fees, probably more. Thus, taking down a line would not have added to our runway at all.

Perhaps in the coming 1-2 years terms will get restrictive, lenders will take a little more risk, and these venture leases will be the decent deal they were back before and during the bubble. But what I've seen in the last 3 years at least suggests that any debt line you'd want, you can't get, and the lines you can get, you don't want.

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I think this is the general rule of venture lending - all geared towards the long term results.

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I've just been reading about the mis-adventures of Rand from SEOMoz on his recent Venture Capital experience.

Good reading, it's good that they're so open with what's going on.

Venture lending is always a bit hit and miss.

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