Debt Financing for Deep Tech: The Big Picture and Early-Stage Venture Debt

By Matt Trotter, Managing Director, Venture Banking

Looking to optimize your capital stack at a venture-backed deep tech company? Learn about how debt financing can play a role in providing scalable, non-dilutive financing.

Deep tech companies use advanced science and engineering to create breakthrough technologies through extensive R&D. Compared to software companies, they often face longer commercialization timelines and more complex deployment. 

Given these challenges, deep tech founders in the early growth stages often don’t plan around working capital—that is, the time between paying suppliers and receiving payment from customers, a gap that can span weeks or years depending on the revenue model.

Today, the deep tech industry is accelerating as more companies transition from concept to commercialization. While this rapid scaling is promising, working capital needs often expand as companies scale revenue. Many CFOs and founders are realizing they should have engaged with lenders earlier for strategies to reduce their working capital cycle. 

Understand Your Working Capital Needs Early 

As your hardware company scales, you’ll need access to substantial capital. Unlike enterprise software companies, hardware companies must consider the capital necessary to build and deliver their product. This capital need is compounded if you sell in a Hardware as a Service (HaaS) business model, which can lead to an extended working capital gap. 

The decisions you make early on in your life as a hardware company will impact you down the road. These early financial engagements, including debt financing, can prevent severe cash flow issues later and will greatly affect the amount of equity dilution a company needs to take. 

You’ll need to set up your capital structure early to accommodate your growth so you won’t later scramble to fund a deal and settle for a suboptimal capital structure under pressure.

To that end, it’s important to have early conversations with banks or lenders to understand what they want to see in your business model. You don’t want to have significant customer demand that you’re not able to support because you either lack the equity or you’re not structured in a way that allows a bank to support you. 

Picture an early-stage robotics company with a pilot customer who decides they want a full deployment across 1000 sites. To meet this demand, the company needs a significant sum of capital to build and ship the robot, but it doesn’t have equity or sufficient debt facility to take on those costs. If it could leverage a debt facility, it would be able to grow much faster. 

Manage Funding Gaps With Debt Financing 

Early financial foresight does more than secure capital. It helps you refine your business model from the start and ensure that your venture remains poised for success. While this article focuses on debt financing, you must negotiate terms for all your core financing areas. Consider how you structure your business model, including contracts, equity, customers, and debt decisions. 

Debt financing helps you avoid equity dilution in these scenarios, offering a flexible solution for addressing capital costs or covering operational expenses. Debt financing for scaling hardware companies is a mission-critical factor for achieving success, and the good news is there are more options than you might expect. 

Take the First Step With Early-Stage Venture Debt 

Securing capital for research, development, and scaling operations is important for deep tech hardware startups from the start. While Series A funding is a major milestone, the journey doesn’t end there. 

Enter early-stage venture debt—a flexible financing option that is more accessible than many founders think, even without contracts or hard assets. Early-stage venture debt can provide capital at a critical time with much less dilution than equity. 

Unlike traditional loans that require tangible assets or established revenue streams, early-stage venture debt is a form of lending tailored to the unique needs of burgeoning startups. 

It complements equity financing, providing funds for flexible use without significantly diluting a founder’s existing equity. However, this form of venture debt is less scalable than other forms of funding.  

Ideal Use Cases for Early-Stage Venture Debt

This type of financing is ideal for venture-backed companies that have successfully raised a Series A or a substantial seed round of at least $5 million. The best time to secure venture debt is shortly after closing your latest equity round, allowing lenders to evaluate the strength of your investor support and the detailed financial data from your recent fundraising efforts. Lenders typically look for companies with at least 12-18 months of financial runway. 

A typical use case for venture debt is extending your runway so you can hit critical milestones before your next round of funding. Timing for equity rounds can be tricky due to market or company conditions, and more flexibility can be helpful. 

For hardware companies, early-stage venture debt is well-suited for focusing on intense R&D and scaling efforts, as you might use venture debt to purchase early equipment for development purposes. 

You should use venture debt judiciously. Ensure that the capital raised aligns with your growth projections and that the debt can be serviced even if subsequent fundraising rounds fall short of expectations. Too much leverage paired with lower-than-expected performance can make your subsequent funding round challenging. 

Who Provides Early-Stage Venture Debt? 

Securing capital is not enough. Find a partner who understands your industry and is committed to your success. 

“Experience and market knowledge matter a lot,” says Zachary Kimball, founder & CEO of Hardfin, a software provider that automates hardware financial operations. “Market understanding from your bank translates to fast, fair deals for hard tech companies. And you want to be able to grow into future products with your capital provider.”

Different providers might be best suited for you at different stages of your business, but understand what arrangements will look like as you scale. 

Venture Banks are specialized institutions adept at working with high-growth, cashflow-negative companies. Leveraging customer deposits, venture banks can offer lower-cost capital but with certain constraints on size and structure. Their clients can enjoy a broader banking relationship that includes other financial services. 

Venture Debt Funds source their capital from limited partners who expect a defined return. Venture debt funds offer greater flexibility regarding loan size and terms, but the larger size comes at a cost: debt from a venture debt fund is more expensive than bank debt, you’ll need to draw it, as the venture debt fund will likely want usage. Only take the larger amount if you need it for a meaningful milestone. This option is most appropriate when your debt need is greater than the typical debt-to-equity ratio or when the overall debt quantum exceeds about $10 million, the upper limit for venture banks. 

Getting Started With Early-Stage Venture Debt 

“Managing the tradeoff of commercial growth and capital strategy is particularly challenging for hardware companies,” Kimball says. “We see deep tech companies leveraging all the tools at their disposal in order to succeed.”

By understanding when to use early-stage venture debt, who provides it, and how to navigate its terms, founders can accelerate their company’s growth while maintaining greater control over their financial future. 

Engage with other founders and financial advisors who have navigated the venture debt landscape. They are a critical source for understanding market conditions—as most venture debt is put in place for private companies, market information can be tough to find on your own. 

Consider partnering with specialized financial institutions like Stifel Bank Venture Banking. We offer tailored solutions for deep tech pioneers and expert guidance to help you navigate the complexities of venture debt for the road ahead. 

Talk to Stifel Bank Venture Banking deep tech financing expert Matt Trotter at mtrotter@stifelbank.com.