Bonus round: taking on some venture debt after a round of VC can give you more bang for your buck

Entrepreneur,  July, 2003  by David Worrell

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Back at Silicon Semiconductor, CEO Kline says that thanks to venture debt, his company is already airborne. In fact, Kline hopes to be able to repay the venture loans from operating revenues. "Thanks to the venture debt, we have already launched an exceptional product--customers are saying we're six years ahead of the competition," says Kline.

There are as many reasons to look for venture debt as there are businesses to fund, but the value of a good venture lender is clear. In a world of pencil-sharpening bankers and demanding VCs, venture lenders may be the best of both worlds.

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In most cases, venture borrowers have truckloads of VC cash and a vault full of assets for collateral. There are, however, exceptions to the rule. "One in 20 of our accounts has reached the stage where the company qualifies on its own," says Dave Wanders, executive vice president of Technology Finance for Transamerica in Chicago.

Those fortunate few include eBags Inc., an online retailer of luggage, handbags and accessories. Although eBags has raised venture capital--about $30 million total--the last VC round was in October 1999, says co-founder Peter Cobb (pictured). These days, eBags is focusing on the bottom line: The company posted its first net profit earlier this year, despite declining air travel and weak luggage sales.

When eBags first took on venture debt in September 2002, it had two consecutive quarters of positive cash flow (earnings before interest, taxes, depreciation and amortization). That, plus the company's uninterrupted growth and a laser-focused business model, was enough to convince Transamerica to roll out a $1 million revolving credit line. Says Cobb, 45, "The money was meant to help fuel our growth and to give us a backup plan."

--D.W.

Since July 2002, when Sarbanes-Oxley Legislation was passed, the number of public companies that went private has increased 26% over the same time period one year earlier.

The number of SBA-backed loans rose 35% in the first half of fiscal year 2003 from the same period last year.

DAVID WORRELL is a financial writer and business advisor in Charlotte, North Carolina. Contact him at david@planzipo.com.

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