Approval of your risk lease
Each year, venture capitalists fund more than 2,500 startups in the US. Many of these companies try to preserve their equity capital by turning to venture leasing firms to provide equipment financing. By obtaining lease financing, these experienced firms can use their equity capital for high-impact activities such as recruiting key personnel, product development, and expanding their marketing efforts.
What are the qualities that make some startups more attractive than others to venture lessors? Here are ten factors that most venture lessors evaluate to decide which startups to fund:
Caliber of the management team
Most venture lessors consider the management team of the start-up business to be the most critical factor in the success of the enterprise. While it can be challenging to quickly assess management talent, there are a few qualities that lessors look for. They are looking for experienced managers with high integrity and a proven track record 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 lessors are looking for experienced venture capitalists with a successful investment track record over several years. Venture capitalists must also have a good reputation for treating lenders serving their portfolio companies fairly. Before entering into new leasing agreements, most venture lessors check whether the start-up’s venture capital sponsors are actively backing them.
Justification of the business plan
Successful startups usually have compelling, well-articulated business plans. Lessors look for signs that startups have promising market opportunities, clear and reliable forecasts, and reliable financial statements.
Cash Position/Monthly Burn Rate
A criterion used by many venture lessors to measure risk is the startup’s projected cash burn rate. The ratio of cash on hand to the startup’s monthly burn rate is a useful measure. It roughly defines how long a startup can last before a new round of capital is needed. The lessor views the transaction as less risky if the startup can make full payments over a significant portion of the lease term without raising additional capital. Most lessors are looking for a ratio that supports at least 9 – 12 months of the startup’s operation.
Equipment quality
The quality and purpose of the equipment is an important consideration for most venture lessors. Most lessors look for transactions involving equipment that is essential to the startup’s operations. In addition, the equipment must have an acceptable salvage value and be easily remarketed for aftermarket equipment.
Product outlook and revenue history
If the startup is in the development stage and has not yet sold products, venture lessors are usually looking for products capable of establishing a strong market position. If the startup’s product is already being distributed, lessors expect strong monthly or quarterly revenue growth. Poor product adoption in the early stages when measured against the business plan can often signal a wrong product launch or wrong product concept.
Evaluation history
Valuation history records the prices of shares sold to investors by the start-up business. Unless there is a good explanation, most lessors expect substantial stock price appreciation in successive offering rounds. The assumption is that the startup is making steady and significant progress in its development, which will be reflected in rising stock values.
Power of balance
Venture lessors usually assess the working capital of the start-up to ensure that the start-up can make payments on time. Along with analyzing the startup’s burn rate, lessors use traditional working capital measures such as current and quick profit ratios. Lessors also look for other signs of balance sheet strength, such as: low to moderate leverage; positive tangible net worth (including subordinated debt); and a minimum paid-in capital of $7 – $10 million.
External professional involvement
Most venture lessors view the participation of reputable and successful external board members as a positive factor for start-ups. A reputable CPA firm, law firm, institutional partners and/or service providers are also viewed positively by lessors. These professionals can bring valuable experience and contacts that can help the new venture succeed.
Execution of payments
As with more traditional lessees, venture leasing companies frown on lessees’ poor payment history. Most venture lessors expect lessees to have a satisfactory payment history unless good explanations can be offered. Like other suppliers, satisfactory payment of bills by customers is where the rubber meets the road. Whether the lessee is a startup or a Fortune 500 company, most lessors view prompt payment as sacrosanct.
While risky lessors use additional factors to make their credit decisions, these ten factors seem to be used universally. While most of these factors are subjective, they have stood the test of time for risky lessors in making informed and sound credit decisions.
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