Move fast and don’t dilute: How to use venture debt to fund acquisitions

Growth through acquisition is an established part of the VC-backed company playbook. But financing a deal is not always straightforward, especially when it is important to raise non-dilutive funding and time is of the essence to secure the acquisition.

In these situations, the solution could be venture debt or ARR based debt, a loan designed specifically to finance high-growth businesses.

“Using debt to make an acquisition is a great way to build value in your business without getting diluted,” says Paul McKinlay, Executive Managing Director and Co-Head at Innovation Banking.

“Banks who have this capability can really add value in transactions because they are experienced, they are competitive, and they can make decisions quickly.”

Who qualifies?

When it comes to financing an acquisition, venture debt or ARR financing can work for high growth companies all the way through to sponsor-backed companies looking to finance deals worth $100 million or more.

Unlike traditional loans, venture debt providers lend to businesses that are burning through cash, often at a rapid pace, in order to fund growth. This applies to companies looking to extend their runway and, increasingly, to those looking to finance an acquisition.

“Both early-stage and late-stage businesses can grow through acquisition,” says Amy Olah, Head of Canada & U.S. West Coast Originations for CIBC Innovation Banking.

“We often have relationships with founder teams and their VC investors from seed stage all the way through their growth cycle until they are ready for big-ticket buyout deals.”

When to use debt for an acquisition

Technology companies typically build momentum and growth by developing a product for a market that others don’t see opportunity in. An acquisition can become an attractive option to supercharge the growth trajectory, or if a strongly-aligned business becomes available.

For high-growth businesses, the motivation for buying another company can include broadening the product suite of features, gaining access to a rival’s technology, bringing in its people, or acquiring its customer base.

Yet the financing for acquisitions can frequently fall apart with less experienced bankers which is why partnering with a trusted institution can be the difference between losing the opportunity or securing the deal.

“The last thing you want to do is agree to buy a company and then the financing falls apart,” says CIBC’s Paul McKinlay “When we give a term sheet, companies know that the financing is going to be there. Risk management has already been previewed. That’s key.”

“The funding can also provide you with extra fuel to invest in your business that’s not going to cost ownership in the company,” he adds.

Need for speed

Negotiations around an acquisition can become fraught with anxiety, and speed is often a key factor in securing the deal.

Venture debt can make the difference in scenarios when financing is needed quickly, or where cash is the preferred currency to buy shares in the acquiring company. Whereas equity funding typically requires months of pitching and means negotiating on a new valuation for the business at the same time as trying to negotiate the acquisition. Debt financing can be approved in a shorter period of time, subject to subsequent due diligence from the provider, and avoids the complex valuation conversation for another time.

In a deal situation, a venture debt provider such as CIBC will often work in partnership with a company’s VC backers, which can lead to discussions around the use of funds. VCs sometimes prefer more of the funds they provide to be used for financing a company’s organic growth plans, rather than an acquisition.

“Equity providers at the early stage often do not want the bulk of their equity used for an acquisition. They often prefer it to be held back to finance the growth, especially in companies with high burn rates” says CIBC’s Amy Olah. “This is where venture debt can really step up.”

Working in partnership

The strong relationship between a company and its investors is an important factor during an acquisition. This is also true of the connection between the company and its debt provider. A loan is rarely a one-off transaction and often signals the start of a broader relationship that can last many years.

Good venture debt or ARR loan providers will have experienced multiple acquisitions and be able to share their experiences, make useful introductions and provide guidance.

“CIBC brought additional value, because we were able to evaluate potential acquisitions that we wouldn’t have necessarily been able to do otherwise, so it gave us the flexibility to be able to look at new strategic opportunities,” says Leigh Silver, CEO at the KEEPS Corporation, a provider of retail service department analytics for the automotive industry.

Where to get started

CIBC Innovation Banking has 25 years of specialized experience in growth-stage tech and life science companies across North America – a longer track record than most banks. CIBC now has over $15BN in funds managed including life sciences, health care, cleantech companies, investors and entrepreneurs, and has assisted more than 550 venture and private equity backed businesses over the past six and a half years. Over the last 12 months, CIBC Innovation Banking has committed over $3BN in venture loans to the innovation economy. Connect with us today to start the conversation.