Venture Debt: A Powerful Way to Fuel Next-Stage Growth

Once considered a niche financing tool, venture debt is increasingly becoming a strategic component of the capital stack.

Many entrepreneurs who build high-growth companies use equity financing to secure the funds they need to scale quickly, enhance their company’s credibility, and attract top talent. But business owners know that fundraising can be time consuming, and that equity financing comes at the cost of ownership. Traditional bank loans can be an attractive way to secure capital, but they require predictable cash flow and collateral—two things many growing companies lack. That’s where venture debt comes in.

CI's Venture Debt Fund

What Is Venture Debt?

Venture debt is a form of debt financing that, unlike a traditional bank loan, does not require a borrower to be profitable or to put up hard assets as collateral. Instead, the debt is typically underwritten using factors like the company’s growth potential, the quality of the investors who are backing it, and its ability to reach future milestones. The debt is typically structured as a term loan, with most lenders requiring warrants—a type of security that gives the lender the right to purchase a small portion of equity (typically expressed as a small percentage of the total loan amount) at a predetermined price to offset the risk. Because venture debt lenders are working with companies that are still burning cash, their risk lens doesn’t look like that of a commercial banker. “We’re taking on a risk profile that looks more like equity than traditional lending,” said Kevin Crowley, senior managing director of investments for Connecticut Innovations. “Our diligence process mirrors our equity evaluation—meaning we assess the company’s management team, product, market opportunity, and business model—but we also place additional emphasis on financial forecasts, cash flow, and repayment capacity.” One of the most important factors, Crowley notes, is the investor syndicate behind the company. “We pay close attention to their track record, their willingness to support the company through future rounds, and their overall reputation in the venture ecosystem.”
"Our venture debt programs are structured to give companies flexibility early in the loan term, when cash is tight and growth investments are critical. In other words, the structure provides breathing room for founders to invest in growth before the bulk of the repayment begins, buying them time to reach the next milestone.”

Connecticut Innovations’ venture debt loans typically have three- to five-year terms and include an initial interest-only period—usually six to twelve months—followed by principal payments that gradually increase, with the bulk of repayment occurring in the final one to two years. The design is intentional. “Our venture debt programs are structured to give companies flexibility early in the loan term, when cash is tight and growth investments are critical. In other words, the structure provides breathing room for founders to invest in growth before the bulk of the repayment begins, buying them time to reach the next milestone,” said Matthew Panicali, a senior investment associate at Connecticut Innovations.

The flexibility inherent in CI’s venture debt offering makes it an appealing option not just for high-growth tech startups, but also for other Connecticut businesses that are in the process of becoming more established, which is why CI doesn’t limit the product to startups. “The typical company we look at for venture debt is venture-backed, growing, and working toward a key milestone or valuation inflection point, but we also work with more established companies that may be eligible for some bank financing but not the entire amount they’re looking to secure,” said Panicali. Often, these are businesses on the cusp of profitability or scaling into new markets, but they may not yet have the historical performance or collateral profile that banks require. “In those cases, we can fill the gap between what the company needs and what the bank is willing to lend,” said Panicali.

For non-venture-backed companies, CI looks for a credible path to bankability within two to three years. “When warrants aren’t a fit, such as with closely held or family-owned businesses, CI can structure a deal with an exit or success fee due at maturity,” said Panicali.

Avoid the “Rescue Capital” Trap

One common misconception about venture debt is that it’s a last resort for companies struggling to raise equity. In reality, using venture debt in that way often backfires.

“Venture debt shouldn’t be seen as ‘rescue capital’ or ‘bridge capital,’” Crowley cautions. “It’s not a solution for companies struggling to raise equity. Rather, it’s a complement to equity that helps extend runway and preserve ownership as the company grows.”

It’s also not a replacement for traditional bank financing. “It should be viewed as a replacement or a supplement to equity and thus compared to the cost of equity,” Crowley said, adding that venture debt works best when it complements, or strategically replaces a portion of, an equity raise.

Another tip: Don’t focus solely on the financial terms of the deal.

“The reputation of the lender and the flexibility of non-economic terms matter just as much as the interest rate,” Panicali said. “Venture debt is not a transaction, it’s a relationship, so you want a lender who will be collaborative if things don’t go exactly as you planned.”

Panicali said CI’s approach to venture debt is deeply founder focused. “We pride ourselves on being the kind of lender entrepreneurs want to work with—one that’s flexible, pragmatic, and committed to the partnership long term. That’s why we go out of our way to avoid overly restrictive covenants and why we take a hands-on approach to helping our companies succeed.”

That partnership extends well beyond financing.

Borrowers who work with CI gain access to the same suite of value-added resources available to CI’s equity portfolio companies, including:

 

In-house talent acquisition support

to help recruit critical hires.

Executive-in-Residence program

which connects startups with seasoned operators and advisors.

CI’s extensive network

from corporate partners and universities to state and municipal leadership.

The Takeaway

When used strategically, venture debt can be a powerful tool for business owners. “We’re seeing founders use venture debt more intentionally to reduce dilution and extend their runway,” said Crowley. “In a constrained capital environment, it’s become an even more valuable part of the capital stack.”

Panicali agrees: “Venture debt benefits founders, employees, and investors alike. It gives companies more time to reach milestones—whether that’s hitting a revenue target, achieving profitability, or securing critical regulatory approval—that can materially improve valuation ahead of the next round. The real strategic power of venture debt lies in its ability to extend a company’s runway without significant dilution.”

Back To Content Library