Getting Your Venture Lease Approved
Each year venture capitalists fund more than 2,500 start-up companies in the U.S. Many of these companies try to conserve their equity capital by approaching venture-leasing firms to obtain equipment financing. By obtaining lease financing, these savvy firms are able to use their equity capital for high-impact activities like recruiting meaningful personnel, product development, and expanding their marketing efforts.
What are the qualities that make some start-ups more attractive than others to venture lessors? Here are ten factors that most venture lessors estimate to decide which start-ups to finance:
quality of the Management Team
Most venture lessors consider the start-up’s management team to be the most basic success factor for the venture. Though it can be challenging to quickly estimate management talent, there are several qualities that venture lessors consider. They look for experienced managers with high integrity and a proven history of business performance.
Quality of the Venture Capital Sponsors
Another important factor for most venture lessors is the quality of the start-up’s venture capital sponsors. Venture lessors look for experienced venture capitalists with successful investment performance over a number of years. The venture capitalists should also have good reputations for dealing fairly with creditors serving their portfolio companies. Before entering new lease arrangements, most venture lessors verify that the start-ups’ venture capital sponsors are actively supporting them.
Soundness of the Business Plan
Successful start-ups usually have powerful, well-articulated business plans. Lessors look for signs that the start-ups have promising market opportunities, clear and credible projections, and reliable financial statements.
Cash Position /Monthly Burn Rate
A yardstick used by many venture lessors to measure risk is the start-up’s projected cash consumption rate. The ratio of obtainable cash to the start-up’s monthly burn rate is a useful measure. It crudely determines how long the start-up can last before a new equity round is needed. The lessor views a transaction as less risky if the start-up can make complete payments during a meaningful portion of the lease term without raising additional equity. Most lessors look for a ratio that supports at the minimum 9 – 12 months of the start-up’s operation.
The quality and intended use of the equipment is an important factor for most venture lessors. Most lessors look for transactions involving equipment that is basic to the start-up’s operation. Additionally, the equipment should have permissible collateral value and be freely re-marketable in the equipment aftermarket.
Product Prospects and Revenue Track Record
If the start-up is in the development stage and has in addition to sell products, venture lessors generally look for products capable of establishing a strong market position. If the start-up’s product is already in dispensing, lessors look for strong monthly or quarterly revenue growth. A poor reception of the product in the early stages, when measured against the business plan, can often signal a faulty product set afloat or faulty product concept.
A valuation history records the proportion prices of stock sold to investors by the start-up. Unless there is a good explanation, most lessors look for meaningful proportion price appreciation over subsequent offering rounds. The assumption is that the start-up is making steady and meaningful progress in its development, which will be reflected in rising proportion values.
Balance Sheet Strength
Venture lessors usually estimate a start-up’s working capital to ensure that the start-up can make payments when due. Along with an examination of the start-up’s burn rate, lessors use traditional working capital measures like the current and quick ratios. Lessors also look for other signs of balance sheet strength, such as: low to moderate leverage; positive tangible net worth (inclusive of subordinated debt); and minimum paid-in capital of $7 – $10 million.
Outside specialized Involvement
Most venture lessors view the involvement of reputable and successful outside board members as a positive factor for start-ups. A reputable CPA firm, law firm, institutional partners and/or service providers are also viewed by lessors as positive. These professionals can bring valuable skill and contacts that can help the new venture to succeed.
As with more traditional lessees, venture-leasing companies frown upon poor lessee payment histories. Most venture lessors expect lessees to have satisfactory payment histories, unless good explanations can be offered. Like other vendors, satisfactory payment of bills by customers is where the rubber meets the road. Whether the lessee is a start-up or a Fortune 500 company, most lessors view prompt payment as sacrosanct.
While venture lessors use additional factors to make their credit decisions, these ten factors seem to be used without exception. Though most of these factors are subjective, they have stood the test of time for venture lessors in making informed and reasonable credit decisions.