The Author's Story of How Venture Leasing Raised a Startup's Equity Value by Millions
The Author's Story of How Venture Leasing Raised a Startup's Equity Value by Millions
Berman and his board were unnerved by the idea of having to raise more equity capital at a lower valuation and sooner than planned. The chief financial officer of the company proposed getting $1.5 million in venture financing right when things seemed to be going south. Preexisting equipment would get about $600,000 of this funding. Future purchases of servers, software, workstations, and testing equipment could be funded with the remaining funds.
Jerry Sprole had been introduced to the company's chief financial officer, Jamal Waitley, by a coworker. Leasing Technologies International, which Sprole oversees from his base in Connecticut, is an equipment finance specialist that works with startups and growing businesses that have received funding from venture capital firms. The finance was secured in less than a month by Waitley. With the money they made from leasing back and selling off old gear, plus the money they borrowed to buy new gear, Berman's business was able to keep running for three more months without raising capital. The pre-money valuation was at least $5 million more than it would have been otherwise when the firm finally completed its $20 million equity round. The stockholders of Berman have made millions of dollars thanks to venture leasing.
Similar to Berman's organization, an increasing number of companies supported by venture capital are utilizing venture leasing to expedite the accumulation of equity value and to expand their infrastructure. Why has venture leasing grown in popularity among firms backed by venture capital, and what exactly is it? In what ways are astute business owners boosting shareholder value through venture leasing? This crucial source of funding for venture capital-backed firms needs to be examined more closely in order to provide answers.
The phrase "venture leasing" refers to the practice of equipment leasing companies providing financing to startups and early-stage businesses that have received funding from venture capitalists. Computers, networking gear, software, and production and research and development tools are necessities for these new businesses, just as they are for Berman's enterprise. Until they establish a profitable business model or reach a certain level of success, these companies often depend on funding from outside investors.
When it comes to funding a venture, what role does venture leasing play? The tale is told by the comparatively high expense of venture capital in comparison to venture leasing. As a kind of compensation for the risk they incur, venture capitalists sometimes obtain substantial equity holdings in the businesses they fund. Over the course of five to seven years, they normally aim for investment returns of 35% or more. A public offering (IPO) or other means of selling their equity shares allow them to reap the rewards. On the other hand, venture lessors often aim for a return of 15% to 22%. The collateralized equipment has an amortization period of two to four years. Venture lessors face considerable risk as well, but they can reduce it through security interests in leased equipment and amortizing transaction structures. Startups are increasingly relying on venture leasing as a means to finance their growth and accelerate the accumulation of equity value, thanks to the clear cost advantage it offers compared to venture capital. Venture leasing offers additional benefits to startups beyond the conventional lease advantages, such as managing cash flow, conserving working capital, providing flexibility, preventing equipment obsolescence, and supplementing other available resources.
How do venture capital leasing companies assess deals? Venture lessors take a number of things into consideration. A strong management team and generous venture capital backers are two of the most important factors in a startup's chances of success. It seems like the two groups often end up meeting each other. In most cases, a successful track record in the industry is a must for a competent management team. Successful venture capitalists often have first-hand knowledge of the industries they fund and a history of providing funding to promising startups. Many of the top venture capital firms have employees with extensive operational experience in the sectors they back. These firms also tend to specialize in certain industries.
Venture lessors assess the startup's business plan and market potential after making sure the management team and VCs are top-notch. The lessor takes into account factors like these during this evaluation: Can we understand the business model? Does one really need this service or product? How big is the prospective market, and who exactly is the target consumer? Products and services are priced in what ways? Can you tell me the expected income? In addition to the anticipated expenditures, what are the costs of production? Is it fair to expect these things to happen? How much money does the startup have on hand, and how long will it be enough to last, based on projections? When will the next round of funding be required by the startup? The lessor can gauge the reasonableness of the business plan and model by asking questions such as these.
For a leasing business providing startup funding, the most critical consideration is whether or not the startup has enough cash on hand to cover its expenses for a substantial portion of the lease term. The lessor can end up losing money on the deal if the venture can't get any more funding and goes bankrupt. To reduce their exposure to this risk, seasoned venture capitalists often stipulate a minimum cash reserve of nine months for new businesses. Venture lessors typically back companies that have obtained $5 million or more in venture capital and haven't even used a significant chunk of it yet.
For venture financing, where can entrepreneurs go? Startups rely on a network of national leasing companies that offer venture leasing as part of their infrastructure. Similar to the lessor from Connecticut who Waitley was introduced to, these firms are well-versed in due diligence, deal structuring, pricing, and documentation, and they have a track record of supporting young enterprises through their successes and failures.
The majority of venture lessors allow their startup clients to arrange numerous takedowns each year by providing leases under lines of credit. Depending on the startup's needs, development projections, and the amount of venture capital support, these leasing lines might range from as low as $200,000 to more than $5,000,000. In addition to providing venture capital, the best venture lease companies help their clients find other resources that can fuel their expansion. The top venture lessors offer a suite of value-added services, including negotiating better equipment acquisition prices, facilitating the sale or leaseback of existing equipment, securing additional working capital funding, connecting clients with interim chief financial officers, and introducing them to prospective strategic partners.
Many firms who receive funding from venture capital are finding that venture leasing is a great way to increase shareholder value. Craig Berman's narrative is only an example based on a real financing, but the concept is the same. Startups can put their venture cash to work by investing in product development, managerial talent acquisition, and marketing expansion, all of which contribute to the growth activities that produce business value. Many astute business owners are taking notice of venture leasing as a source of funding for new ventures because it is less expensive than venture capital, doesn't necessitate board representation or management control loss, and typically leads to minimal or no equity dilution.
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