← Run the Numbers
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- [00:00]
A
What lenders typically are doing is not will this company become the next SpaceX? What lenders are really doing is trying to figure out the likelihood a company will go on to raise their next equity round.
- [00:14]
B
A lot of venture debt and even private credit is being used to fund the AI boom and a lot of the servers. It's not like you can use them again in three to five years. These things are melting off the walls.
- [00:25]
A
There are end customers who want these data centers or signing contracts and willing to take all of the compute. And if anything, you might argue it's supply constrained.
- [00:36]
B
Why shouldn't you use your own general counsel to do the legal work?
- [00:39]
A
General counsels are great. Where they tend to be less great is when they think they can negotiate the company's side of a legal process for venture lending.
- [00:50]
B
I want to talk about what a reasonable legal timeline for like closing out a venture debt deal is.
- [00:56]
A
For most debt deals, I'd say it's six to eight weeks. Can it go faster than that? Sure. Can it go meaningfully longer than six to eight weeks? Definitely.
- [01:09]
B
Is this thing on Yesterday's price is not today's price? Welcome back to Run the Numbers, the podcast where we talk with the world's top CFOs, investors and operators about how capital actually gets allocated. I'm cj, a tech cfo. My goal is to tease out the frameworks and deal mechanics that make you better at allocating and protecting capital. On today's show, I'm speaking with Marshall Hawks. Marshall is a longtime venture lender who's worked with companies like wow, Airbnb, Cloudflare, Fitbit, Nerdwallet, Okta, Thumbtack and Twitch. And he recently wrote a book, Demystifying Venture Debt, one of the most misunderstood tools in the startup capital stack. Marshall has done hundreds of deals across multiple cycles and has seen venture debt evolve from a niche niche. Is it niche or niche niche? Ben? I don't know. It's niche. A niche bank product mainstream and sometimes overused financing instrument. In this episode we'll go deep on the biggest myths about venture debt. What it is, what it isn't why lenders underwrite likelihood of raising again more than world beating outcomes the Venture Debt Sweet spot why Series A and B company is borrowing 25 to 40% of their last equity round tend to be the core market and when lending shifts to a percentage of ARR banks versus private credit how funding sources change incentives why private credit can be more transactional and what that means for pricing and flexibility how venture debt actually gets repaid the three real sources of repayment and why the next equity round is often the primary one and doing deals the right way, realistic time frames, legal costs, how many lenders you should negotiate with and why your general counsel probably should not quarterback the process. Please don't do that. If you like the show, please remember to like and subscribe. It helps us with the algorithmic overlords. And if you're looking to hire the best finance and accounting talent, boy oh boy, I would love to help you. I run a recruiting service that pairs you with thoughtful, qualified. They're just awesome candidates from our warm community of finance leaders. These are the people who voluntarily read credit agreements for fun. If that's of interest, shoot me an email talentoslymetrics.com and we can talk onto today's episode with Marshall Hawks. Marshall, welcome to the Run the Numbers podcast.
- [03:27]
A
Hey cj, Nice to be here.
- [03:28]
B
I feel like I'm coming up in the world because now I got real life authors on this show. Marshall, this is crazy.
- [03:33]
A
Big time.
- [03:34]
B
Marshall. Congrats on the book launch. I read it all in one weekend, believe it or not. What's your background that led you to writing this? Because it wasn't a small undertaking.
- [03:43]
A
Sure, it's my first book, maybe my only book given the amount of effort that had to go into it. I came out of the venture lending and banking ecosystem, spent more than two decades at four different firms working with venture backed startups of all shapes and sizes. The bulk of that time was 16 and a half years at Silicon Valley bank or SVB. I left in March of 2025 about a year ago to write this book and to see if I could kind of lift back the curtain a little bit on just venture lending as an industry for founders and entrepreneurs who might be navigating that for the first time and sort of want to learn more about it.
- [04:24]
B
I joke all the time that there are a lot of books out there written about strategy, but not many written about tactics. But from my seat cfo, the most valuable books have tactics in it. Like teach me something that I can use tomorrow on the job. I feel like you really did that with this book.
- [04:38]
A
I tried to do that for sure to make it actionable and you know, a reference book that is, you know, somewhat evergreen and it's actually modeled on a book of sort of similar ilk called Venture Deals. My book's called Venture Debt Deals. The original Venture Deals written by Bradfield Jason Mendelson of Foundry Group, longtime venture venture capital firm based out of Colorado the book is, I think, 14 years old now, first came out in 2011, but it really demystified venture capital and how venture capital firms operate and what's in the venture capital term sheets. You'll see because investors do it all the time. Entrepreneurs raise capital maybe on one hand, maybe two across their career, if that. So that book was a sort of seminal work that allowed people to, you maybe get rid of some of the asymmetry between the investors and the entrepreneurs. It's in its fourth edition, so I sort of tried to mirror that level of practicality, depth, maybe add a little bit more humor. No offense to Brad and Jason, they weren't, they weren't quite as funny as I think I was in my book and maybe allow entrepreneurs to learn about another tool in the toolkit for how to capitalize a business.
- [05:45]
B
That's a great book. I remember, I read it when I became, I think, director of fp made a venture backed company for the first time because I was like, how are these guys even coming up with the valuations or choosing to invest in us? So that, so that was helpful. Marshall, just for context, how many venture debt deals do you think you've done in your multi decade career?
- [06:02]
A
You know, I wish I maybe tracked that better, but it's at least several hundred companies that I lent capital to directly and then you can imagine working at banks which, where I spent all of my career, there's a whole litany of portfolio companies you have that are just, you know, bank clients for a chunk of time. So that's a much bigger number than, than that. A couple thousand probably that I've worked with and my teams have worked with directly. But the lending, where I was the lending point and providing capital directly, a couple hundred companies.
- [06:30]
B
Couple hundred. Can you rattle off a couple of the names?
- [06:33]
A
Sure. I've been fortunate enough to work with some really impressive companies that the success of those companies is very much on the shoulders of the entrepreneurs involved. Airbnb, Twitch, Okta, Cloudflare, Fitbit, Planet Labs.
- [06:48]
B
That's incredible. Well, I want to talk a bit about venture debt and give people an on ramp to start out here and we can go deeper. But what is the sweet spot for venture debt lending?
- [06:59]
A
Most venture debt, if you want to talk about it in terms of deal volume, happens at the earlier stages of a company's life cycle. So series A, series B company that has raised institutional capital but could be still pretty early on in their life cycle. That's where the bulk of the venture debt deals happen. Most of those are Coming from venture banks like SVB and others. As companies get bigger, there is certainly a sort of a secondary sweet spot as you scale and things are really working and maybe the model is repeatable and you've got big customer contracts and you know you're getting into the tens of millions of revenue. You start to access money from some banks, but also mostly from private credit firms where the largest amount of dollars deployed happens at the upper end of the market where people might borrow, you know, 75, 100, $200 million in one go.
- [08:00]
B
Marshall, you mentioned that startups have raised their series A or B equity financing. They're prime candidates for venture debt. Can you speak to why it usually goes along with an equity fundraise and maybe like how much cash are we talking here that you can typically get?
- [08:15]
A
Yeah, most of the venture debt deals as we talked about, the majority of them happen at that early stage right on the heels of equity validation or new money from investors coming into the company. Lenders like that because they get to ride on the coattails of the diligence that those venture fund or funds did on the company. Insert your joke about venture capital diligence quality here, but you at least get the benefit as a lender that someone else. Typically people who are a lot more technical than lenders are. Lenders can be somewhat technical, but you're usually not a CS major, engineering degree or anything like that in lender landscape. So you want people who at least have done some modicum of diligence on the entrepreneurs, the founders, that. Not that these companies will be successful, nobody really knows that for sure, but it's that these people at least have some credibility in going after the thing that they're trying to attack or build. That's sort of the reason number one. Reason number two early on is that when a company raises equity, it might seem a little bit odd that that's when they want to go borrow money, but that's when lenders are going to feel the most comfortable providing capital. Particularly when a company series A Series B may not have everything figured out. They could still be even pre revenue or pre product depending on the industry we're talking about. Even if the debt is meant to be Runway extending capital a couple of years down the road, lenders tend to like that company. They're going to lend money to, to have, call it 18, 24 months of their own cash to start. Even if the debt is going to be used to provide Runway down the road.
- [09:58]
B
I often joke that vc their mindset is what could go right Here for a home run and a lender, they're thinking about what could go wrong here for something like to go to zero. And when you think about it, right after you raise an equity round and you have cash in the bank, that's the most optimistic time, right? Like it's a downside because you have some money there.
- [10:20]
A
I made a joke for years, I still do actually, that I used to watch Looney Tunes on Saturday mornings. My parents, you know, when I was a young kid and there was Yosemite Sam and the Roadrunner and everything else, and Yosemite Sam used to run around with a dark cloud over his head only and it was just raining on him all the time. That's kind of like being a lender, right? You're, you're just worried about what thing can go wrong, what kind of risks do we have? You're trying to use as many tools and data points as you can to, to mitigate that, including, you know, providing capital when a company's that early on the heels of equity coming in.
- [10:54]
B
Well, speaking of data points, one of my favorite parts about your book was, I believe it was at 25 to 40% of the last raise is, is somewhat of a, what do you call it, a quantum in, in your world, that that's kind of the amount that's typical to take out in debt.
- [11:08]
A
What most lenders, at any stage of that barbell we talked about, or whenever you're providing capital, one of the big risks you're trying to avoid is over leveraging the business such that the debt becomes problematic to repay or that there is a question mark of whether new investors might want to fund, you know, another round of equity because the debt is just so big. So one of the proxies to avoid what you're. What I just described is the rule of thumb you just laid out cj where it's in the series A series B stage of a company's life cycle. What you would typically see from lenders, again mostly banks at that stage, is about a third of the dollars you've raised, you might be able to borrow via the venture lending ecosystem. The broader metrics of the business notwithstanding, depending on the state of the equity market, if a series A equity round becomes $200 million yet the business is still very early. You know, the, the percentage of an equity round goes down as the equity round size goes up. So you probably wouldn't be able to access, you know, $70 million of debt on that $200 million equity raise. So the sliding scale, if you Will on the far ends of those percentages as equity rounds particularly get bigger.
- [12:34]
B
You beat me to it because I was going to ask about all these AI infrastructure companies who are raising hundreds of millions of dollars. They don't have a single dollar in revenue yet. I don't think someone who's a credit analyst is going to say, you know what, I'm still going to give them a third of that.
- [12:49]
A
Yeah, you get a little bit more scrutiny for sure. You know, that third really applies to, let's call it equity rounds that are $50 million or less, where I think that math makes sense. And as equity rounds get bigger or the scale of the business gets bigger, I think that percentage based methodology doesn't really work as a rule of thumb. You know, generally if a company's getting bigger from their own performance, you shift to something like a percentage or multiple of revenue or acv, tcv, something like that. If it's still early, you really would have to dig deep to get comfortable getting up to, you know, bigger amounts of venture debt, sometimes even zero revenue. Businesses could access a lot of capital. If you're a life science company, for example, and you've got a drug going through the FDA approval process, you know, if you've hit certain gates in the FDA approval process, you might be able to access 50, $100 million of venture debt. You know, that could be a very large percentage of your equity raised previously because you're sort of de risking or hitting milestones that really make the lenders get more comfortable. But in general tech land, I think those rules of thumb we were talking about apply.
- [13:59]
B
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- [17:23]
A
We talked about again the barbell and I think at the early stage of a company's life cycle. So again, Series B or earlier, what lenders typically are doing is not will this company become the next SpaceX or anthropic or Apple or whoever, Pick your best company. If we could do that or I could have done that as a lender, I would have left lending, become an investor and made a lot more money somewhere else. What lenders are really doing at that early stage is taking their best guess. And this is by the way, more art than science trying to figure out the likelihood a company will go on to raise their next equity round. That's the key, which is different than will this company become a gigantic breakout success? What they're really thinking is what are the odds this company, if it was, you know, Series A recently, if I provide some debt alongside that Series A, what is the potential for it to raise a Series B successfully in call it 18 to 24 months. And I think arguably that's an easier question to answer even though you may get it wrong sometimes, than saying, is this company that I'm lending money to at the Series A going to become in 10 years a multi hundred billion dollar public company? That's a very different question. As you get later in a company's life cycle and different types of lenders are involved at that point, most of the time you are getting a lot closer to picking winners. You know, if a company is pre IPO, getting ready to file their S1 and maybe wants to bring on some venture debt, that's where you might be saying, well, this company is clearly best in class. You know, it is the winner in the space just because there's a lot more data and time. But again, early on it's much more about is this company just going to raise its next round and that's what's going to help pay back the debt?
- [19:12]
B
And what are the three ways that lenders usually get repaid.
- [19:16]
A
This tells me you definitely read the book, if you remember, sources of repayment. Every lender who is listening to this, if you have some listening, is going to groan at the the thought of sources of repayment because it's one of those things that, you know, lenders get grilled into them from their internal credit teams that help, you know, set credit policy, all the rules around what you can and can't do in Normal commercial banking. So where most companies borrow money, where most banks are providing debt, you want to have three sources of repayment and they typically are cash flow from operations. So that implies that these companies are profitable.
- [19:51]
B
Yeah, I was going to say that implies they're actually making money and it's
- [19:55]
A
sort of assets on the balance sheet. So if you had, you know, AR equipment, whatever, sort of number two and then you know, sale of the company as number three is sort of your tertiary source of repayment. In the startup ecosystem where venture lenders play, it's a small subset of lenders that do venture lending. Three sources of repayment are still important, but they're different. Typically what you would see since companies in 95% of the cases, maybe even more than that, 99% are not going to be profitable, may not even be EBITDA positive. The first source of repayment is typically just cash, proceeds from equity financing. So have you gone and raised that next equity round? Not that you're going to pay off all your debt in one lump sum, you might just pay it off over a 2, 3, 4 year period or maybe at a big chunk at the end of the life of the loan, but that, that equity that a company is raising is what will continue to help service that debt. Number two is assets. Sort of similar to the normal commercial banking land. Though most venture backed companies don't tend to have beyond the cash that they've raised. You know, unless you're a, I guess an AI, you know, these days you might be a little bit more cap ex intensive or hard asset intensive. Businesses that have, you know, physical assets on the balance sheet, that's number two. And the number three tends to be some kind of sale of intellectual property of the business, which most of the time in venture capital backed companies, ip, there may be classical ip, but frankly if a business hasn't been able to figure out how to monetize or found, you know, product market fit the odds that there's a lot of IP value there is pretty negligible.
- [21:36]
B
I want to tie this to what we're seeing in the current markets today because a lot of venture debt and even private credit is being used to fund the AI boom. And you think about, well, how do you get repaid and what's an asset if you did need to sell it, what can you collateralize? And a lot of the chips that they're using, a lot of the servers, that's where the money's going. It's not like you can use them again in three to five years. These things are melting off the walls. What's your take on that?
- [22:02]
A
While I was at svb, certainly that was being looked at and helped finance where I'd say most of the GPU financing and data center build out that's been going on for the past 12 to 18 months has happened, is at the upper end of the market. Meaning big private credit firms, some of the biggest private equity players in the ecosystem or sorry in the world, have come into the venture backed company ecosystem and have been willing to provide you hundreds of millions of dollars and in some cases billions of dollars to do this infrastructure build out. And that's not all just them being flippant about the risk. There's, there's real asset value and if you're helping, you know, build out a building that's going to have server racks in it and GPUs and you'll have to take your own perspective on what's the depreciation of, you know, not just the economic depreciation but the, you know, the, the technical depreciation of how long these GPUs are going to be useful for how quickly they're going to get repaid. But unlike, you know, the dot com run up in the 90s into sort of the 2000, 2001 where it all fell apart, where there was a lot of fiber built out back in the day that was being built out kind of regardless of whether there was a customer who was going to use it, that these days, at least right now, there are end customers who want these data centers and are signing contracts and willing to take all of the compute power. And if anything, you might argue it's supply constrained where you know, you need more chips in the ecosystem. So that's, I think some of the, at least the thought process and bet that a lot of the bigger private credit firms have been taking when financing companies, AI sort of infrastructure buildouts, if I can generalize. You know, obviously there's going to be, you know, a lot of specific variability depending on what the type, what type of company and who the lender is. But that's, I think generally the thesis.
- [23:51]
B
Well, it's a great segue because the third voice in the room here is private credit. What's your definition of private credit?
- [23:58]
A
Two big lending groups in venture lending would be the venture banks and then private credit depending on the country you're in. This is probably more of a US centric audience, but I was the token American helping run SVB Canada for a number of years. The Canadian branch of Silicon Valley bank where there's governmental players as well in venture lending, and that's true of some other countries. But in the US largest market in the world, there's sort of venture banks and private credit. Venture banks are typically trying to use their venture debt in most situations as sort of customer acquisition financing. And they want to bring on a company early on a series a minted company. They might provide debt through the life cycle of that company if the company needs it. If they don't, they still get the benefit and they hope to be able to be the bank to that company for years, maybe the entire, you know, duration of that company's lifecycle and maybe work with that entrepreneur or entrepreneurs, multiple companies over venture banks. They take their deposits, they lend that money out. That's their source of funding sort of banking. One on one, you take cash from people who have it and lend to people who need it. Private credit mirrors venture capital in a lot of ways in how they structure their funds. They raise third party capital from a variety of types of limited partners. Some of them are the same sort of pensions and endowments that you'll see in venture capital funds. Some private credit firms, they're called BDCs or business development corporations. They are publicly traded and you and I could be a shareholder in those businesses. But there's a mix of private and public entities under the umbrella of private credit. So don't take the name private credit to say every company or every fund there is private. They take that third party money and then they lend it out to companies that need it. Private credit writ large has become, I think, sort of the asset class of the moment of the last couple years. And if anything, I think when we're talking here at the beginning of 20, there's been a little bit of people poking holes and is there too much private credit and is there too much risk being taken? And that's private credit in the broad sense. I think in venture lending, which is a very narrow slice of private credit, you don't have quite the same concerns, at least to date. And again, these firms take money from third parties, they lend it out to startups of all shapes and sizes and they don't do any banking. They don't care about where you bank. They don't use deposits because they're not a bank in the first place. One of their big selling points actually is that if you take money from a private credit firm, that you don't have to keep your banking at the bank that provided you the debt. If you're taking money from private credit you can make anywhere you want.
- [26:29]
B
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- [30:20]
A
The typical delta between, call it a venture bank, your average venture bank deal and a private credit deal, assuming they were sort of the same size, probably about 4 to 5% or 400 to 500 basis points in the interest rate and sort of fees, the differential there another part of the compensation. In fact, a big key component of the venture lending world is that lenders are typically going to take in almost every scenario a warrant in the company as well. Sort of a stock option to a fund or a company, depending on the situation. You know, private credit firms might, might, you know, want a larger warrant depending on what's going on. The big thing to call out there, that difference in economics is both the business models of the lenders, as you rightly called out the adventure. Banks and private credit are structured differently. They tend to also be playing at different parts of the market. You know, most venture bank deals are going to be sub 30 million at the high end, probably sub 20 or 15 million more commonly. And you know, private credit these days tends to not really show up or provide capital or be interested in providing capital. Over 30 million certainly, but like more like 50 or 60 million right now, given how the best opportunities probably in, in the market can sort of credibly ask for 50, 60, $100 million these days given just the size of the private market has continued to grow. I mean, OpenAI and SpaceX are private and they're bigger than most public companies. So the, the private credit landscape, you know, goes way higher than almost all of the duration of my career. You know, it was rare. You saw deals that were north of, you know, 40, $50 million. And these days that's kind of the entry point. To be honest.
- [31:56]
B
That had been my rough rule with them that private credit doesn't get out of bed in the morning for less than 50 million.
- [32:02]
A
It's not that they're lazy or they don't want to work. Companies, they, they both know that the bank market is harder to be competitive because of the pricing differential, but also, you know, they have to make all their money on the debt and that means not just the pricing is different, but they need companies that need that money and they need to borrow it right now. What venture banks more readily allow companies to do is to wait 6, 12, 18, maybe even longer months to decide whether they want to borrow the money that they've, you know, signed up to potentially use from a bank private credit. Again, another sort of nuance is that, that they, given the nature of the funds they've raised, want to see that money get used. So that kind of by definition means you got to have a company that has need for that kind of, you know, costly capital. Because the other option is I have to go raise equity and dilute my own ownership stake and my employees ownership stake and the existing investors. So instead of raising, you know, 100 million in equity, I'm going to raise, you know, maybe that amount or 75 million in debt to, to then use
- [33:09]
B
one of the fancy words that's thrown around is a syndicate, which to my knowledge is a group of lenders that work together to spread the risk and they each take chunks. Which group typically has sharper elbows? Do banks want to take the entire thing because it's a smaller amount? Do private credit funds want to say, hey, we're going to do a 300 million dollar deal, I'll take 50, you take 100, you take 50. How does that dynamic play out?
- [33:34]
A
I would say that most venture debt deals are not syndicated, meaning they're held, they're held 100% by whoever's providing them. Two probably exceptions to that. One is when a private credit firm is providing capital, they may themselves, within their firm have a variety of Pools of capital raised from perhaps different parties that may be named on, you know, the documents. They may also be not named. And you don't know that there's, you know, multiple pools of capital. That's pretty normal and common where just like a venture fund might have their early stage fund and a growth fund or an opportunity fund, sort of a similar dynamic. That's certainly one area where that might be happening. The other is if the deal size is so big, somebody wants a partner or partners to syndicate out the transaction to minimize risk. But I'd say most of the time, you know, the private credit or banks are, generally speaking, for all of the capital themselves. Where you get more syndicated transactions is in other types of lending that banks may provide. Stuff like big revolving lines of credit tied to your accounts receivable or your recurring revenue or maybe equipment financing. There's sort of just different types of capital where the dollar sizes, given that the debt is less risky, gets way bigger. And you'll see syndicated debt deals all the time at that level.
- [35:04]
B
That totally makes sense. I want to get down to the brass tax. I hate when people say that. I don't know why I'm saying brass tax, but let's do it. I want to talk about what a reasonable legal timeline for closing out a venture debt deal is because there are CFOs, CEOs listening right now saying, I want to start this, but I got to have some sort of backstop of how long this is going to take now.
- [35:26]
A
Yeah, the legal process certainly is a big chunk. Sometimes it could be the majority. More than 50% of the time is spent on, you know, legal work. For most debt deals, I'd say it's six to eight weeks is a reasonable time frame. From you've signed a term sheet and now you've gotten through all of the legal documentation process documents are signed and the dollars are available to you or funded to you. Can it go faster than that? If everyone's motivated, working towards a specific time frame, sure. Can it go meaningfully longer than six to eight weeks? Definitely.
- [36:02]
B
What's meaningfully longer in your career?
- [36:05]
A
I mean, I've had a couple legal processes go out like a year.
- [36:08]
B
No.
- [36:09]
A
Which is kind of bonkers. Most of that was. Yeah. And there was some renegotiation going on both of the legal terms, but the debt terms too. So, like the deal points usually that involved, you know, maybe not the most experienced legal counsel on the company side. Just a lot of things that aren't ideal and no one enjoys that process. Lender or company, but can go longer, understandably or justifiably if the debt deal is large and the business is complex and there's a, you know, perhaps very healthy legal back and forth. But again, I'd say sort of that six to eight week time frame is a good rule of thumb. Certainly within, you know, a quarter you should be able to be done and the deal paper numbered.
- [36:55]
B
And maybe a different way to look at it. What's the optimal number of turns of sending the paperwork back and forth?
- [37:02]
A
The number of turns is always a little misleading because it just depends on the volume of comments. You know, you could have a lot of turns and if the comments weren't all that significant and each one might not be that big a deal, the other direction could be equally true. You might have one turn of the document, but the entire 100 page loan and security agreement, which is the, the main document you use to memorialize a venture debt deal, if all of it comes back and it's all red, meaning the whole thing's been redlined. Like just because it's one turn doesn't mean it's going to be, you know, faster. Slight, that could be a disaster and take a year to get work through that kind of thing. Generally, you know, three to five turns of the document is probably a norm. But I had a number of law firms, two law firms in particular, DLA Piper on the lending side and Fenwick and West on the company side, write a little bit content in the book venture debt deals. They both sort of bristled when I asked the same question of them, like what is the number of turns? Like? Well, the turn thing doesn't really. It might be synonymous with, you know, time frame and dollars spent, but it, it can vary pretty widely. So I don't know, three to five is my best guess.
- [38:11]
B
You mentioned law firms there, who's typically fronting the bill for these deals to go down.
- [38:17]
A
Sadly, that is that the company tends to pay the legal expense of both parties. So the company's own costs and then the lender's costs as well.
- [38:28]
B
I hate that part. That's always irked me, particularly about venture capitalists. They're giving me all this money, but then I get to pay your $50,000 in legal fees.
- [38:36]
A
As someone who's now no longer in the industry, I certainly appreciate that, that sentiment. And you know, I think a few, a few of the banks, depending on how early, you know, they're doing a debt deal with a company might be willing or occasionally are willing to pay their own legal bill. What they tend to also say though that goes with that is to use a form that's kind of non negotiable. So we can't sit and go back and forth on a bunch of legal negotiation perhaps driven by the company. You know, we'll pay for own costs, but you know, here's the form and you have to take it or leave it.
- [39:06]
B
So that's sort of the trade off Inside baseball question. If, if you're in my shoes as an operator, should you negotiate for a cap?
- [39:12]
A
A legal cap I think is always a good idea on how much cost is going to go towards lawyers, but you just need to know that the legal cap itself is. You got to pick the right number with enough cushion to make sure everybody feels comfortable to agree to it. And then probably more importantly, whether you had a legal cap or not, what I would say is proactive communication between, you know, company and lender or you know, between all parties, including the councils involved, the law firms, where are we at, how much cost has been incurred? You know, sort of keeping tabs as you go through a process is probably equally, if not more so going to help help corral legal costs or at least maybe bring the business parties back to the table to say, hey, this is getting out of hand. Like we got to focus on the things that really matter and maybe the lawyers don't need to be involved and we got to figure out some business points just with the principles and not law firms.
- [40:03]
B
Well, this is an early contender for put this on a bumper sticker in 2026. Why shouldn't you use your own general counsel to do the legal work?
- [40:12]
A
General counselors are great where they tend to be less great. In my, and almost every lender's experience is when they think, think they can negotiate the company's side of a legal process for venture lending. It's not they don't understand the law, it's not that they don't understand commercial lending. They just don't do it at a velocity or volume to know what is normal, what is a lender possibly even going to be willing to negotiate and where are they just going to say we will never change that, ever? You know, pound sand I have never had a process in my two decades plus of all the hundreds of venture debt deals I've done myself had a process go faster because the general counsel was involved or be less expensive because what ends up happening is you go, you know, seven rounds back and forth and you say, listen, we can't agree to something or you know, we, we Just don't do this. And then inevitably either the deal fails, which can happen more commonly, the general counsel then says, fine, I'll call our either corporate council or bring in the likes of a Fenwick and west or whoever. And so now you spend all this time yourself and you've got to bring an outside counsel on top of that who has to get up to speed on what the negotiations were. And so you end up just burning more time and more money than it's really worth.
- [41:27]
B
Marshall, we talked about the legal component of this. I'm a CFO and I get a lot of questions around which forecast should I provide? Because you got your, you know, I'm raising equity capital, pie in the sky, we're going to hit $100 million in three years. Then you got your annual plan of what the board is holding you to, but then you also have your over deployed quota plan. I want to zoom in on what plan I should give to my lender. I'm guessing this should be a little more conservative.
- [41:53]
A
I think lenders generally want to see what you think is the most likely, which is probably a more conservative view. They don't need to see the up and to the right asymptotic sort of line that equity investors generally like to see, even if they know it's not necessarily likely to happen. Exactly, exactly. That way, if you have sort of your base case, your downside case, your upside case, like showing a lender all three of them is not a bad thing, they want help in understanding your thinking as a CFO or a CEO. Like how are you guys modeling this data? We know the data is not going to be perfectly right, if not even close. But we want to hear how you are thinking about the business, the business model. What are the underlying sort of levers that are going to drive either underperformance, sort of outperformance just on plan and that's really what a lender's kind of getting at. So whatever you have, I don't think it's bad to share sort of everything. I would say if you're setting venture lending does not tend to have financial covenants involved until you get to the really upper end of the market at 75, $100 million from private credit firms. But if you are setting financial covenants, you certainly want to guide it to a place where you are using your base or downside scenario. And you want to get everybody comfortable with a, a, you know, covenant level or covenant levels, tracking performance to plan revenue, your balance sheet, something like that. You want plenty of margin in those levels such that you are meaningfully off plan. And everyone agrees that that's true at the start. You don't want to have arbitrarily, you know, too tight a covenant package. Again, that's not something that's that common in venture debt. At least the totality of deals done, but just something to think about.
- [43:34]
B
What should people expect in terms of reporting cadence? So many will send, you know, a minimal flash note each month to the board and then they'll do more of a comprehensive wholesome package on a quarterly basis and then annual. What does it look like when you're working with lenders?
- [43:49]
A
The main thing that lenders are going to ask for, that you are going to be on the hook for as a company who's borrowed money is you're going to need to send in the monthly financials.
- [43:58]
B
So you need financials on a monthly basis?
- [44:00]
A
Yeah, company prepared monthly financials. Unless you're a public company or right about to be a public company. Maybe it's quarterly, but almost every, every lender wants monthly. You got to send an annual company prepared financials historical as well as if you're getting an audit. You know, when the audit's done, you need to send in the projection for the for the new year whenever it's sort of ready or updated. That's somewhere in Q1 typically. There's some other things in that. What I would say is what you just described though of like the flash monthly, a more comprehensive quarterly and annual sort of board level package is that some lenders ask for that sort of board deck or board pack as well. Even if they don't, I would encourage most companies and CFOs and operators to think about your lender at that board level type of reporting that even if they don't require it. Getting your lender more information. You can remove HR sensitive stuff, maybe something if you were, you know, evaluating lending options that doesn't include that lender. You can take that out. But like all the rest of it, giving more information to a lender is not going to freak them out. Actually it makes them more, more. Even if there's things that aren't working in the business, it just makes you more comfortable as a lender that you know what's going on in the business. You know, everyone's running around with the hair on fire and there's always something breaking and if you don't hear about that from the company directly and you have to start asking about like what's not working and you know, what, what is and what is not and what you know, what are you trying to solve? You sit there having to grasp what do I not know versus if I get all of the board reporting. It's like, you know, I might see things that aren't working, but actually that makes me more comfortable in almost every case because I don't have to go chasing CJ to find it and ask a bunch of questions. Again, just treating your lender sort of as a board level participant, even if that's not required, I think has mostly upside and very little downside, assuming you've chosen a good partner to work with in the first place.
- [45:54]
B
Sage advice from Charlie Kev, CFO of Carta, who's one of the first ever guests on my podcast over 200 episodes ago. He said, CJ bad news should always travel fast. Pick up the phone. I'm guessing in your shoes, Marshall, throughout your career you've had finance leaders or CEOs pick up the phone and call
- [46:10]
A
you with bad news you expect it with. I mean, even some of those great names of the companies I worked with that we rattled off beginning of this conversation, they didn't take straight line paths to the success that they are today. And you know, everyone talks about the, you know, 10 year overnight success and all that kind of stuff and people can lose that in the high points of, of the tech business cycles we all go through right now with AI. Most good lenders know that there's going to be ups and downs, there can be things that don't work, there's going to be surprises, there's going to be things a competitor, you know, new competitors showing up and what they do, getting them information about what is and is not working quickly is assuming you chose a good partner. That should be a positive thing in the mind of the lender as opposed to a negative. If they have to like hear at the last minute when the company's already they been dealing with the problem for, you know, days, weeks, months, that something is wrong and they didn't hear about till then. Like that's going to freak them out way more than if they heard about it like hot off the press. Something is, something broke, somebody left the company, that was critical, you know, just all that stuff. And here's what we're doing about it. You know, that's, that's what lenders want to hear proactively.
- [47:14]
B
And I think that's what I was poking at. You get the call and you're like, oh, that sucks, something's wrong. But then you're also kind of like, oh, they think of me as a partner here and I know more about the business than I did before. So actually it's less of a downside risk because I'm fully informed 100%.
- [47:30]
A
And maybe even in the best case, a lender might be able to help with something, whether that's capital related, maybe. But actually it could be like, we've got this problem. Do you know anybody to replace the VP of sales who just walked out? You'd be surprised if you treat your lending partner with that kind of transparency and candor what you might get out of it.
- [47:48]
B
I want to talk about Twitch because this case study was one of my favorites in the book. It made everything that you were talking about real. You did a number of deals with them, right?
- [47:57]
A
It was the first company that I started to work with when I joined SVB In January of 2009, when you recall that timeframe, that was kind of when the financial world was ending. Ironic given what happened to SVB about 13 years later. But the first company I was sort of handed as a relationship manager VP was Justin tv and that was the precursor to what became Twitch. And I sort of closed that first transaction and then we did four total deals to them over their lifespan before they got acquired by Amazon.
- [48:29]
B
That helped them minimize dilution. Right?
- [48:31]
A
There's plenty of others, but Twitch is just such a well known name given they've continued to be sort of the de facto esports company in the world really to this day, that, you know, venture debt gets bandied about. There's a lot of people who talk about it online with a declarative oh, it's terrible or it's great. I think Twitch is a great example of, of a good outcome. Both the company that they built a phenomenal business. The venture lending alongside didn't necessarily drive the success, but it helped when the company was able to achieve that success. It helped everyone who was involved own more of the business than they would have otherwise, because they would have. In fact, we had a variety of conversations with the company pretty later on where, you know, they were thinking about do we raise equity? Do we take on a little more debt? They did a mix of both, first of all. Second of all, the debt though, when you look at the modeling that we did after the outcome when Amazon bought them for just a little bit under a billion dollars, 75, $100 million of equity value to the existing shareholders. So that's again the founders, that's employees, that's the existing venture investors. Then had they gone out and Raised equity.
- [49:38]
B
I think you worked with the Canadians for too long Marshall, because you're being awfully modest. That was the headline I was trying to tease out of you. I mean 75 million or more in equity value that changes employees lives by just having their financial capital structure.
- [49:51]
A
Venture debt is certainly just a tool. It can be used well, it can be used poorly, but when used well, balanced out with equity, everything else it can be, it can have a meaningful impact on individual humans lives. If you have a good outcome down the road and even if you don't have a good outcome, it can sort of help a company survive longer, maybe not crash and burn as hard. You can over lever a business and there can be problems from venture debt for sure, but that's not unlike like venture capital where you can raise too much money and have other problems from BC dollars too.
- [50:20]
B
Well, gearing towards a close. Where do you think we are on that spectrum? When you look at 2026 and how many deals are being made today? Are we getting over our skis or is it more of a nuanced message where you have to look at it sector by sector? There's a funny quote that there are no atheists in foxholes and there are no atheists at 11x debt to EBITDA. And if you think about some of the companies that are taking on these huge private credit deals now, I mean correct me if I'm wrong, but these are like of a scale we've never seen before.
- [50:50]
A
Definitely of a scale we've never seen before, that is for sure. I think the jury's out on whether it's a bubble or a bad thing. I think the difference with some of the upper end of the private credit landscape, mostly private credit, there's a few banks that play up at the high point or these higher dollar amounts too, is that these companies have real businesses. I mean it's not the dot com boom. It's not like there's nothing there. They have in customers, they have people with multi year contracts, they have physical assets that are being, you know, built out that might have, you know, value unrelated to the business. So real business is there for one, for two. Most of these bigger transactions tend to have some financial controls or financial covenants. So these big funds, private credit funds who are providing this capital aren't just doing it blindly with no guardrails. Probably a better question sort of remains to be seen just how good long term partners, all of the private credit players, particularly some of the newer ones in the space, are going to be over time. Because I'm sure you and I would agree that even though there's some world changing AI businesses being built already, that not all of those companies will succeed and not all of them will become liquid and public companies. So when those companies that don't work go sideways or down, you know how to both equity players and lenders react to that. And some of the people in probably both camps actually. Venture capital and venture debt are newer and doesn't mean they're bad partners, doesn't mean they're going to be bad at what they do. But the potential for a wide range of reactions when things aren't going well is probably pretty high and it'll be interesting to see.
- [52:31]
B
Last one I got for you. You put a lot of work into this book. What was the most surprising or counterintuitive takeaway you arrived at while researching? At writing. Because you got to look back at 20 years of doing it yourself, but also just the industry writ large.
- [52:46]
A
I think a thing I had to balance when writing this book is when you've done this job and been in this industry for more than certainly a few years, in my case a long time. I had hair and it wasn't gray when I started. The things that I might think are not novel or interesting or worth writing down. Sort of trying to balance. Like putting yourself in the beginner's mind of a brand new entrepreneur, founder, CFO even, who hasn't ever navigated the venture lending landscape. Took me a while to figure out like the right balance. I hope I've struck that balance. Readers like you and others will decide whether I have or not. But make the book accessible to people while not, you know, completely dumbing it down too much. That was something that was a hard thing for me to check and balance for what I thought might not be worth writing about when talking to entrepreneurs and a bunch of gps actually as well. You realize most people don't have the depth or detail of the venture lending ecosystem and sort of the business models, the players and what motivates these firms to do what they do through. Writing that down and getting people to affirm that that was worth reading took some time.
- [53:54]
B
I write a newsletter. I struggle with myself because there's a ton of stuff out there on the 101 and there's a lot of stuff written on like the 701 that's way over my head. The sweet spot is something like the 201 where you can onboard someone and get deeper. And my favorite part about the book was the inside baseball and the incentives because I can look up in a dictionary or I can google a couple of times the definitions of what private credit is versus venture debt. But to know why certain players act in the ways they do, right, wrong, or indifferent. Like a lot of these people are just normal people driven by incentives. That part I think was the most illuminating to me.
- [54:31]
A
That makes me happy with my choice of college degree. I'm an economics major by training, which probably not the most useful degree to be honest. But one of the things you certainly remember is that incentives matter and they drive behavior. And that I think continues to be true through across this industry and, you know, humanity in general.
- [54:48]
B
Awesome. Well Marshall, where's the best place for people to get the book?
- [54:51]
A
Anywhere books are sold. If you want the easy button, you can go to either Amazon where you'll find venture debt deals in all the formats. You can also go to VentureDeals.com my website that'll get you anywhere you want to go. Those are probably two places that are easiest to find the book thanks for
- [55:05]
B
spending time with us today. This has been great.
- [55:07]
A
It was great Beer. Enjoyed the conversation.
- [55:08]
B
CJ Run the Numbers is a mostly media production yelling an intro by Fat Joe. Artwork by Meg d'. Alessandro show is executive produced by Ben Hillman. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me. A guy who feeds his dog way too much ice cream and has a history of net operating losses. Lol. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom and have a great day.
- [55:37]
A
Peace.