LEASING EQUITY : Craig Berman beamed noticeably after finishing his board presentation. Berman, CEO of a startup that develops nanotechnology applications for the defense industry, had just closed a $ 20 million equity round.ENTURE
Berman finalized the round at an equity valuation that made the entire board blush. Just six months earlier, Berman’s team faced a daunting technical delay that set the company back a quarter of a year. With just four months of cash remaining from a previous equity round.
The delay would cause Berman’s company to consume cash faster and to fall short of an important benchmark. The prospect of raising additional equity earlier than anticipated and at a much lower valuation than anticipated was a chilling idea for Berman and his board.
Just as things appeared to be headed downhill, the company’s CFO broached the idea of obtaining $ 1.5 million in venture leasing. Generally $ 600,000 of this financing would be used to finance existing gear. The balance could be used for up and coming acquisitions of PC workstations, servers, software, and test gear.
A colleague had presented Jamal Waitley, the company’s CFO, to Jerry Sprole. Sprole heads Connecticut-based, Leasing Technologies International, a leasing firm specializing in gear financing for venture capital-backed startups and rising development companies.
It took Waitley less than a month to get the financing in place. Cash from selling and leasing back existing hardware along with a leasing line to add new gear allowed Berman’s firm to operate three extra months without additional equity.
At the point when the firm finally finished its $ 20 million equity round, the pre-cash valuation was at least $ 5 million more than it would have been otherwise. Venture leasing had literally created millions of dollars for Berman’s shareholders.
Like Berman’s firm, a developing number of venture capital-backed startups are taking advantage of venture leasing to construct equity value faster and to expand infrastructure. What is venture leasing and why has it turned out to be so attractive to venture capital-backed startups?
How are savvy entrepreneurs using venture leasing to increase shareholder value? To discover answers, one must take a closer take a gander at this important financing source for venture capital-backed startups. The term venture leasing describes gear financing given by hardware leasing firms to pre-benefit.
Early stage companies subsidized by venture capital investors. Like Berman’s firm, these startups need business essentials like computers, organizing hardware, software, and gear for generation and R&D. These firms generally depend on outside investor support until they demonstrate their business models or achieve profitability.
Where does venture leasing fit into the venture financing blend? The relatively mind-boggling expense of venture capital compared to venture leasing tells the story. To compensate venture capitalists for the risk they take, they generally get sizeable equity stakes in the companies they finance.
They typically seek investment returns of at least 35% on their investments more than five to seven years. Their returns are achieved via an IPO or other sale of their equity stakes. In comparison, venture lessors seek an arrival in the 15% – 22% range.
These transactions amortize in two to four years and are secured by the fundamental gear. Although the risk to venture lessors is also high, venture lessors mitigate the risk by having a security interest in the leased gear and structuring transactions that amortize.
Taking advantage of the obvious cost advantage of venture leasing over venture capital, startup companies have gone to venture leasing as a significant source of financing to support their development and to assemble equity value faster.
Additional advantages to startups of venture leasing incorporate the traditional leasing strong points – conservation of cash for working capital, management of cash stream, adaptability, management of hardware obsolescence, and serving as a supplement to other available capital.