Delaying a trip to the VC well
Venture debt allows for autonomy
Busbud, a Montreal- based startup whose app lets users buy bus tickets in 10,000 cities across 63 countries, has so far raised $ 10 million in venture capital. And it expects to pursue a Series B round — just not yet.
However, it recently secured a loan from Silicon Valley Bank (SVB), which started in 1983 and as of the first quarter of 2016 had US$ 44 billion in assets and US$ 18 billion in loans.
The turn to debt is part of a somewhat unorthodox funding strategy Busbud executives contend will better prepare the company for additional venture capital. In other words, they are delaying raising more venture capital by using venture debt.
“We’re not desperate for money,” said David Burridge, Busbud’s vice- president of finance and corporate development. “We can be more selective on the deal we take. If it’s not the right time we can back away.”
It’s not often venture capital is avoided, particularly if it’s there for the taking. But several Canadian companies are choosing to delay, if not avoid using it, as a way to maintain control and focus.
“This doesn’t happen very often,” said New Brunswickbased angel investor Gerry Pond, when asked about the frequency of venture-backed companies pursuing alternative funding before returning to the VC well. “The VC route is preferred for growth.”
Yet there are proven methods for operating and thriving without venture capital, said Pond.
One approach involves taking a “strategic investment” from a customer or allied party. Brovada, one of Pond’s investments, secured such an investment from an insurance company. ( Brovada’s technology was focused on the insurance industry).
For the most part, though, Brovada was funded with revenue. “We spent what we made,” said its founder and CEO Karl Greenlaw. “Whatever profit we made we threw back into the business.”
The benefit of that approach was control. “We were able to make changes because we had control over the dayto-day operations of the business,” Greenlaw said. “I had pretty much pure autonomy.”
Last year, Virginia- based Towers Watson acquired Brovada for an undisclosed sum. Greenlaw admits he has enjoyed the financial resources available under a wellfunded parent company.
“It was a nice change of direction,” he said. “Sometimes with bootstrapping you want to grow faster than you can.”
Another way to delay a venture round, Pond said, is to finance growth through an internal “companion” business that makes money, such as a consultancy. That’s the path his company, Saint John, N.B.-based Mariner Innovations Inc., is on.
“The third approach would be private equity,” he added, “but the company would require strong results for some time, (perhaps) 10 years.”
Debt is often considered a dirty word, especially in startup circles, Busbud’s Burridge said. “Some people when they hear the word ‘debt’ get scared, and it can be burdensome,” he said, noting interest payments can eat into a startup’s cash flow.
However, the terms secured from Silicon Valley Bank differ from those offered by traditional banks. SVB earns interest on the loan, as well as securing a small piece of equity, though Burridge calls it a “negligible” slice of the company. “We don’t even think about it.” And the interest rate is fair.
Busbud is permitted to return some or all of the money, paying what Burridge calls a reasonable penalty. “They don’t lock you in,” he said. Negotiating a similar deal with a traditional Canadian bank would be “extremely, extremely difficult.”
While Burridge won’t reveal how much the loan was for, he said the bank typically lends $1 million to $5 million.
Knowing the funds are available allows the 40- person company to focus on growth during the busy summer travel season.
“Going out to VC equity markets is extremely demanding. It takes a lot of resources. It takes a lot of time,” Burridge said.
He also contends the longer Busbud delays new funding, the more valuable it will be. “It’s money which allows us to scale and be more patient before we go out to raise a Series B,” he said.
GOING OUT TO VC EQUITY MARKETS IS EXTREMELY DEMANDING. IT TAKES A LOT OF RESOURCES. IT TAKES A LOT OF TIME. — DAVID BURRIDGE, BUSBUD, EXPLAINING WHY THE BUSY SUMMER SEASON ISN’T THE RIGHT TIME TO LOOK FOR A DEAL