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The Hidden Costs of Venture Debt

Biotech entrepreneurs are increasingly borrowing money rather than raising equity. So-called venture debt seems like a tempting option for all startups that need large up-front investments but will generate almost no revenue for many years.  

Companies say they’re attracted to the deals because debt doesn’t dilute existing shareholders’ stock. In return, lenders secure relatively higher-yield deals when interest rates are still very low. It seems like a win-win, but venture debt may be more costly than entrepreneurs and startup employees realize.

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In other words, venture debt can work beautifully in a rising market. But if things go wrong, crunches can occur that entrepreneurs should account for before they do the deal.

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Silicon Valley Bank, a major provider of venture debt, says that more than a third of its early-stage clients have raised venture debt.