In part one of this series, we unpacked the growing venture debt opportunity, and the reasons that commercial banks have historically not participated in this market. However, there are early signs that pioneering banks are overcoming these challenges through innovative structures and engagement models. Given the compelling market gap, how can banks effectively participate in the venture lending opportunity?

Participating in venture debt

Selected commercial banks have started offering venture debt to complement their overall service offering – seeing the value in a new revenue stream and portfolio of smaller deals that may mature into large commercial clients. These early adopters have tended to adopt common techniques and operating structures to address the barriers identified in part one:

  1. Outsourcing deal origination and due diligence
    Rather than establishing specialised internal capabilities, participating commercial banks have tended to partner with established venture capital firms to source and qualify deals – benefitting from their expertise in startup scouting and due diligence. This reduces the cost of deal origination and credit assessment for banks, and provides direct access to market-leading insights on startup funding requirements across their development lifecycle.

  2. Developing bespoke assessment and underwriting models, tailored to venture-stage companies
    Successful commercial banks have adopted new end-to-end lending frameworks tailored to venture-stage companies – from credit assessment models to monitoring and compliance. Unlike traditional bank lending, venture debt lenders look for evidence that companies can repay loans from future equity and enterprise value – including market traction, customer retention, and milestone achievement. Underwriting criteria are closely correlated to the company’s life stage and capital strategy; calibrated to the applicant’s current and projected burn rate.

    Moreover, venture debt pioneers have leveraged equity round data, including funds raised and valuations, to inform credit assessments and loan structures. Typically, the loan size is set to 20-35% of the company’s most recent equity round, supplemented with an assessment of the venture’s growth rate, investor syndicate, consumer base, and potential capitalisation risks. According to Silicon Valley Bank, the venture debt-to-valuation ratio (a common metric for evaluating debt worthiness) has trended consistently at 6-8% of the company’s last post-money valuation – demonstrating the close link between venture debt decision making and the broader venture capital ecosystem.

  3. Leveraging equity kickers to deliver financial upside
    To mitigate risk whilst charging competitive rates, venture debt lenders typically take stock warrants in either common or preferred stock, covering ~5-20% of the value of the loan. The warrants are then typically exercised when the company is acquired or goes public, providing an opportunity for lenders to share in the upside of a borrower’s growth. Some lenders also seek to obtain rights to invest in the borrower’s subsequent equity round on the same terms, conditions and pricing offered to its investors in those rounds – reducing the cost of debt by securing future equity value.
  4. Collateralisation of venture assets
    Although venture debt is typically unsecured, lenders may increase security over the debt through cash collateralisation (for example through taking a deposit of cash to lend against) or through bespoke asset-based security. Given that many venture-stage companies do not have significant traditional collateral, specialist lenders often use intellectual property to secure the loans. Some lenders do not require collateral, and instead offer revenue-based structures, where monthly repayments are tied to the borrower’s inflows.

  5. Offering adjacent financial services
    To optimise the value of venture debt portfolios, leading commercial banks provide a holistic financial services offering to borrowers, including deposit-taking, providing business banking accounts, payroll services, international payments, and leasing (leveraging existing due diligence). Moreover, through bringing on borrowers as banking clients, banks can shift the growing company’s future revenues directly onto their balance sheets – providing an additional revenue stream, and reducing the risk in their loan portfolio through enabling the bank to monitor its investment by tracking deposits.

  6. Setting up a specialist lending arm
    Commercial banks who offer venture debt products tend to set up a separate operating structure or arm within the bank to offer both venture debt and equity propositions. For example, Wells Fargo launched specialist capital provider arm, Wells Fargo Strategic Capital, and Bank of America created a new team focused on capital raising and advice to privately owned companies, providing debt products and connecting startups with their high net worth clients to facilitate direct equity investment.

These common success factors show that, armed with the right operating model, commercial banks are not only well placed to enter the venture debt market – but to outcompete non-bank specialist lenders, given their ability to reduce risk (and therefore the cost of debt) through lending up and down the company lifecycle. In addition, banks may be able to pioneer new product constructs in the market, including securitised portfolio models, enabling securitisation and risk diversification of the portfolio, and opening participation opportunities to a wide range of investors.

Common success factors show that, armed with the right operating model, commercial banks are not only well placed to enter the venture debt market – but to outcompete non-bank specialist lenders.

There is no time like the present

As commercial banks continue their search for yield, venture debt presents a compelling opportunity to create additional revenue streams – delivering promising yields at relatively low default rates – as well as seeding a pipeline of potential assets for M&A advisory and direct capital participation. Moreover, falling valuations may significantly increase the short-term demand for debt, particularly for later-stage companies who are reluctant to participate in more expensive down-round equity financing.

Given current market conditions, banks have an unprecedented opportunity to capitalise on a growing industry, and complement their existing external innovation engagement models, unlocking commercial and strategic upside. A growing market, a right to play, and a way to win – banks, are you ready to venture for yield?

Elixirr have helped commercial banks and specialist lenders develop the strategies, business models and operating structures required to effectively capitalise on white-space market opportunities. To find out how we could support you in effectively capitalising on this growing opportunity, reach out to us at today, or getting directly in touch with or

Relevant sources and further reading: