As mentioned in a prelude recently, Venture Debt is often a commonly misunderstood source of capital for growing SaaS startups.
In order to fully understand why, let’s start with breaking down the business model of a VC (Equity) and Venture Debt fund.
VC (Equity) Fund
The Pareto principle applies to VC funds — 80% of returns come from 20% of startups.
Below is an illustrative VC business model taken from a TechCrunch article published last year.
Source: Money Talks, Gil Ben-Artzy
Limited Partners (or “LPs”) — the family offices, institutions, corporates, pension funds, endowments, sovereign wealth funds, and fund of funds that invest in funds — expect at least a 3x return on capital committed and invested over a typical 10-year VC fund life. This equates to a minimum internal rate of return (“IRR”) of 12% annually. (In reality, top quartile VC funds perform much better.)