Debt as Venture Capital

43 Pages Posted: 15 Jun 2009 Last revised: 7 Oct 2010

Date Written: June 12, 2009


Venture debt, or loans to rapid-growth start-ups, is a puzzle. How are start-ups with no track records, positive cash flows, tangible collateral, or personal guarantees from entrepreneurs able to attract billions of dollars in loans each year? And why do start-ups take on debt rather than rely exclusively on equity investments from angel investors and venture capitalists (VCs), as well-known capital structure theories from corporate finance would seem to predict in this context? Using hand-collected interview data and theoretical contributions from finance, economics, and law, this Article solves the puzzle of venture debt by revealing that a start-up’s VC backing and intellectual property substitute for traditional loan repayment criteria and make venture debt attractive to a specialized set of lenders. On the firm side, venture debt helps entrepreneurs, angels, and VCs avoid dilution, improves VC internal rate of return, assists VCs in monitoring entrepreneurs, and follows from capital structure theories after the first round of VC funding.

Keywords: venture debt, venture capital, capital structure, agency costs, monitoring, entrepreneurship, start-up

JEL Classification: G24, G32, K12, K22, M13

Suggested Citation

Ibrahim, Darian M., Debt as Venture Capital (June 12, 2009). University of Illinois Law Review, Vol. 2010, p. 1169, 2010, Univ. of Wisconsin Legal Studies Research Paper No. 1081, Available at SSRN: or

Darian M. Ibrahim (Contact Author)

William & Mary Law School ( email )

South Henry Street
P.O. Box 8795
Williamsburg, VA 23187-8795
United States

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