Get your venture lease approved

Each year, venture capitalists fund more than 2,500 start-up companies in the United States. Many of these companies try to maintain their equity by turning to venture leasing firms to secure equipment financing. By obtaining lease financing, these savvy companies can use their equity for high-impact activities such as recruiting key personnel, product development and expanding their marketing efforts.

What qualities make some startups more attractive to venture lessors than others? Here are ten factors most venture lessors consider when deciding which startups to fund:

caliber of the management team

Most venture lessors consider the startup’s management team to be the most critical success factor for the venture. While it can be difficult to quickly assess managerial talent, there are several qualities venture lessors consider. You are looking for experienced managers with high integrity and a proven history of business performance.

Quality of venture capital sponsors

Another important factor for most venture lessors is the quality of the startup’s venture capital sponsors. Venture landlords are looking for experienced venture capitalists with a successful investment performance over several years. The venture capitalists should also have a good reputation for dealing fairly with creditors serving their portfolio companies. Before signing new leases, most venture lessors check whether the venture capital sponsors of the start-ups are actively supporting them.

Solidity of the business plan

Successful startups usually have compelling, well-formulated business plans. Lessors are looking for signs that the startups have promising market opportunities, clear and credible forecasts, and reliable financial statements.

Cash Position / Monthly Burn Rate

A metric used by many venture lessors to measure risk is the startup’s projected cash burn rate. The ratio of available cash to the startup’s monthly burn rate is a useful metric. It roughly sets how long the start-up can last before a new round of equity is needed. The lessor considers a transaction less risky if the start-up can make full payments for a significant portion of the lease term without raising additional equity. Most lessors look for a relationship that will support at least 9 – 12 months of the startup’s operation.

equipment quality

The quality and purpose of the equipment is an important factor for most venture lessors. Most lessors look for transactions involving equipment essential to the startup’s operations. In addition, the gear should have an acceptable collateral value and be easily resellable in the gear aftermarket.

Product prospects and sales balance

When the start-up is in the development phase and has yet to sell products, venture lessors typically look for products that can build a strong market position. When the startup’s product is already in distribution, lessors look for strong monthly or quarterly sales growth. Poor acceptance of the product in the initial phase, measured against the business plan, can often indicate a faulty product launch or product concept.

review history

A valuation history records the share prices of the shares sold by the start-up to investors. Unless there is a good explanation, most lessors expect the share price to rise significantly in subsequent rounds of offers. 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 startup’s working capital to ensure the startup can make payments due. In addition to an analysis of the startup’s burn rate, lessors use traditional working capital metrics such as current and quick metrics. Lessors also look for other signs of a strong balance sheet, such as: E.g.: low to moderate level of debt; positive tangible net assets (including subordinated liabilities); and a minimum paid-up capital of $7 million to $10 million.

External Professional Involvement

Most venture lessors see the involvement of well-respected and successful external board members as a positive factor for start-ups. A reputable CPA law firm, law firm, institutional partners and/or service providers are also rated positively by landlords. These professionals can bring valuable expertise and contacts that can help the new business succeed.

payment performance

As with more traditional lessees, venture leasing companies frown on lessees’ poor payment histories. Most venture lessors expect lessees to have satisfactory payment histories unless good explanations can be offered. As with other providers, the satisfactory payment of bills by customers is where the rubber hits the road. Regardless of whether the lessee is a start-up company or a Fortune 500 company, most lessors consider timely payment to be untouchable.

While venture lessors use additional factors to make their lending decisions, these ten factors appear to be used universally. While most of these factors are subjective, they have proven useful for venture lessors to make informed and sensible lending decisions.