de Rassenfosse, G. & Fischer, T., 2016. "Venture Debt Financing: Determinants of the Lending Decision". Strategic Entrepreneurship Journal 10(3), 235-256.

Abstract
Venture debt lending is a form of start-up financing that lies at the intersection of venture capital and traditional debt. We analyze the lending decision criteria of 55 senior U.S. venture debt lenders (VDLs) using a discrete choice experiment in order to understand how VDLs overcome barriers that traditionally hamper start-ups' access to debt. We find, first, that the provision of patents as collateral is as important as the provision of tangible assets to lenders. Second, VDLs showed a marked preference for start-ups that offered warrants. Third, venture capitalists' backing substitutes for a start-up's positive cash flows.

Keywords: venture debt, high-growth start-up, patent signalling, collateral, start-up financing
JEL classification: G21, G24; O34; L26

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This article:

• Provides insights into the business model of venture debt lenders;
• Analyzes the lending decision criteria of U.S. venture debt lenders using a discrete choice experiment;
• Tries to explain why lenders provide money to informationally opaque start-ups with negative cash-flow and no tangible assets to be used as collateral;
• Offers one of the first evidence of a financing business model in which patents are taken as collateral;
• Finds that venture capitalists' backing substitutes for a start-up's positive cash flows;
• Estimates that venture debt lenders provide about one venture debt dollar for every seven venture capital dollar invested;
• Provides additional rationales for having VCs onboard and for applying for patents, namely the opportunity to obtain venture debt;
• Documents the existence of a patent signalling effect.

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• Debt financing of high-growth startups, DRUID Working Paper No. 11-04
• Debt financing of high-growth startups: The venture debt business model (mimeo)