Venture Debt: A Deal With the Devil You Know

capable of wreaking havoc if overindulged. For biotech founders staring down the barrel of cash burn and trial delays, it offers a beguiling promise: extend the runway, skip the equity dilution, and keep your cap table intact. What’s not to love?

Plenty, as it turns out. Like all debts, venture loans must be repaid, often at the most inconvenient of times. In an industry where a single failed trial can tank a company’s valuation overnight, the certainty of fixed repayments and the iron grip of covenants can transform a lifeline into a noose.

The Allure: Borrowing Without the Burn

Let’s be honest—debt feels cleaner than equity. There’s no need to carve up your company’s ownership yet again, no new board members demanding a seat, and no awkward discussions about how your valuation might be a touch optimistic. A loan from a venture lender is a simple transaction: cash today, repayments tomorrow. The interest rates, typically hovering around 10%, seem reasonable when stacked against the cost of another equity round. Add in a few warrants, and everyone walks away happy.

But debt is not as benign as it seems. For a biotech founder, the reality of repaying that loan can come crashing down just as a regulator raises its eyebrow or a clinical trial reveals a confounding set of side effects.

How It Works: Cash Now, Strings Later

1. Loan Size: Typically, venture debt is pegged to your last equity round—about 20–30% of the amount raised. If your Series B brought in $50 million, expect an offer of $10–15 million.
2. Repayment Terms: Loans are repaid over 24–36 months. Many include a grace period (perhaps six months) before principal payments begin, giving you time to hit that next milestone.
3. Covenants: These are the lender’s rules, designed to ensure you don’t get too creative with their money. They may require minimum cash reserves, revenue targets, or board observation rights. In short, you don’t just take the money—you marry the lender.
4. Warrants: Venture lenders don’t just want interest; they want upside. Warrants give them the right to buy equity at a fixed price later, ensuring they win if you do.

The Risks: Boom, Bust, and Bankruptcy

Biotech, as anyone in the industry will tell you, is a boom-and-bust business. Success comes in massive leaps: a Phase II trial that hits endpoints, a regulatory approval, or a partnership with big pharma. But failure is a constant shadow—whether it’s a failed trial, delayed approval, or unexpected competition.

The problem with debt is that lenders don’t care about your pipeline or your passion for science. They want their money back, preferably on time.

Covenant Chaos

Covenants—the fine print in your debt agreement—can quickly turn hostile. Miss a revenue target, and the lender may hike your interest rate. Burn through too much cash, and you’re in breach of contract. The result? Lenders can recall the loan, demand penalties, or force you into a fire-sale equity round.

Case Study: Synergy Pharmaceuticals

Synergy Pharmaceuticals is the cautionary tale every biotech founder should memorize. Flush with optimism (and debt), it launched its gastrointestinal drug, Trulance. Sales flopped. The debt? Non-negotiable. By 2019, Synergy was in bankruptcy court, its assets sold for a pittance to creditors.

Exit Obstacles

Debt can also complicate the dream of an acquisition. A potential buyer might hesitate to inherit your liabilities, particularly if covenants impose restrictions on operations. For a sector reliant on M&A for exits, this is no small risk.

Why Borrow?

Given the risks, why do companies even bother with venture debt? For some, it’s a matter of survival. Equity rounds take time and often come with harsh dilution. Debt, by contrast, can be arranged quickly and offers a clean injection of cash without the painful math of cap table reductions.

For others, debt is strategic. It provides the runway to hit a major milestone—whether that’s completing a trial or securing regulatory approval—which can dramatically increase the company’s valuation in the next equity round.

The Moderna Playbook

Moderna, the mRNA wunderkind, used venture debt to good effect. Before its IPO, the company borrowed to fuel its research, repaid the loans with its public offering proceeds, and emerged as a $10 billion powerhouse. Debt, in this case, acted as a bridge—not a barrier.

The Metrics: Is Debt Worth It?

Before signing on the dotted line, founders should run the numbers.

1. Debt-to-Capital Ratio: If debt exceeds 25% of your total funding, tread carefully. Over-leverage is a fast track to insolvency.
2. Runway Extension: Ensure the loan provides at least 6–12 months of additional runway. Anything less might not justify the risk.
3. Cost of Capital: Compare the effective cost of debt (interest + warrants) to the dilution of an equity round. If debt starts looking pricier than equity, reconsider.

Lessons for Founders: Borrow with Eyes Wide Open

1. Plan for the Worst: Assume your milestone takes longer or costs more than expected. Can you still service the debt?
2. Read the Covenants: Covenants are not suggestions; they are rules. Understand every clause before you sign.
3. Leverage Strategically: Debt works best when it’s tied to a clear, achievable goal that will unlock new value for the company.

Conclusion: A Loan and Its Strings

Venture debt is not a villain. Nor is it a savior. It’s a tool—one that can be wielded to great effect or catastrophic failure. For the biotech founder who chooses to borrow, the key lies in clear-eyed realism. Know your milestones, know your risks, and, above all, know your lender.

Because in biotech, the boom is always sweet—but the bust can be unforgiving.