Using venture debt - the insurance policy
The last post covered how a venture loan can provide additional cash runway. Venture debt can also act as an insurance policy. Take the example, again, of the company burning $0.5mm per month that raises $6.0mm to fund 12 months of runway. It needs to hit a milestone (such as product development or securing contracts from three key enterprise customers) before the 12 month point to get step up in valuation.
The burn is based on a revenue/bookings assumption through the funding period. If one of two quarters of bookings/revenue are soft the company could find its 12 month cash runway drop to 9 months.
The insurance aspect of a venture loan can help here.
A venture loan typically has no financial covenants. This allows the company to operate knowing the borrowed cash is there to spend until the next fund raising.
Taking a venture loan at the time of the equity round gives the company comfort that it will have enough operating cash to get through a period of soft bookings. In this case, the original plan for 12 months of cash runway is protected by taking the venture loan.
If there aren't any bookings hiccups the company will have more than 12 months of runway which is always welcome.