How to Get Approved for Your Venture Lease
Each year, venture capitalists finance more than 2,500 start-ups in the US Many of these companies try to preserve their equity capital by approaching venture-leasing firms to secure equipment financing. By obtaining lease financing, these savvy companies can use their equity capital for high-impact activities such as hiring key personnel, developing products, and expanding their marketing efforts.
What are the qualities that make some start-ups more attractive to venture capitalists than others? Here are ten factors most venture-lesslords look at when deciding which startups to finance:
Caliber of the management team
Most business lessors consider the startup’s management team to be the most critical success factor for the business. Although it can be challenging to quickly assess management talent, there are several qualities venture landlords consider. They are looking for experienced managers with high integrity and a proven track record of business performance.
Quality of Venture Capital Sponsors
Another important factor for most VC lessors is the quality of the startup’s VC backers. Venture landlords are looking for experienced venture capitalists with successful investment returns over several years. Venture capitalists must also have a good reputation for treating creditors who serve their portfolio companies fairly. Before entering into new lease agreements, most venture lessors verify that the venture capital sponsors of the new ventures are actively supporting them.
Solidity of the Business Plan
Successful startups often have compelling, well-articulated business plans. Landlords look for signs that new businesses have promising market opportunities, clear and credible projections, and reliable financial statements.
Cash position/monthly consumption rate
A yardstick used by many venture lessors to measure risk is the projected cash burn rate of the start-up. The ratio of cash on hand to the start-up’s monthly consumption rate is a useful measure. It crudely determines how long the startup can last before a new round of actions is needed. The lessor considers a transaction less risky if the startup can make full payments for a significant portion of the lease term without raising additional equity capital. Most landlords are looking for a relationship that supports at least 9 to 12 months of start-up operation.
team quality
The quality and intended use of the equipment is an important factor for most venture lessors. Most lessors seek transactions involving equipment that is essential to the operation of the start-up. In addition, the equipment must have an acceptable warranty value and be easily resalable on the equipment aftermarket.
Track history of revenue and product leads
If the startup is in the development stage and has yet to sell products, venture lessors are generally looking for products capable of establishing a strong foothold in the market. If the startup’s product is already in distribution, lessors are looking for strong monthly or quarterly revenue growth. Poor product reception in the early stages, when compared to the business plan, can often indicate a faulty product launch or a faulty product concept.
valuation history
A valuation history records the prices of shares sold to investors by the startup. Unless there is a good explanation, most lessors seek significant stock price appreciation in successive offering rounds. The assumption is that the startup is making steady and significant progress in its development, which will be reflected in rising share values.
Balance Sheet Strength
Venture lessors typically assess a new business’s working capital to make sure the new business can make payments when due. Along with a start-up consumption rate analysis, lessors use traditional working capital measures like current and quick ratios. Lessors also look for other signs of balance sheet strength, such as: low to moderate leverage; positive tangible net worth (including subordinated debt); and minimum paid-in capital of $7 – $10 million.
External professional involvement
Most venture lessors view the involvement of reputable and successful external board members as a positive factor for start-ups. Landlords also consider a reputable CPA firm, law firm, institutional partners and/or service providers positive. These professionals can bring valuable experience and contacts that can help the new venture succeed.
payment performance
As with more traditional lessees, leasing companies frown on lessees’ poor payment histories. Most venture landlords expect tenants to have a satisfactory payment history, unless good explanations can be provided. Like other providers, customers’ successful payment of invoices is where the rubber meets the road. Whether the tenant is a startup or a Fortune 500 company, most landlords view prompt payment as sacrosanct.
While risky lessors use additional factors to make their credit decisions, these ten factors seem to be used universally. Although most of these factors are subjective, they have stood the test of time for at-risk lessors to make informed and reasonable credit decisions.
