Venture debt is one of the fastest-growing financial products; unfortunately, many startup founders are still unaware of its many benefits. Applied Real Intelligence (A.R.I.), a Los Angeles-based investment manager, is aiming to introduce founders to the reality that venture debt is a cheaper, viable, complement to traditional equity financing.
Venture debt funding, unlike equity funding, is non-dilutive to a company’s founders. Founders can borrow money to support their growth and expansion, without having to sell ownership stakes in the companies that they have worked so long and hard to build. Moreover, debt is less expensive than equity, and obtaining a loan is faster than raising capital through an equity sale.
Venture debt typically consists of loans, with a maturity of three to five years, that are made to growth-stage startups. At this stage, borrowers have sufficient cash flow to make interest payments and repay the loan principal. For many Series B (and later) startups, utilizing venture debt in conjunction with their equity raise has become a “no brainer” decision.
In addition to educating founders on the benefits of venture debt, A.R.I. is unique in its mission to democratize access to capital for all types of early-stage founders, including women, people of color, and other underrepresented groups. Shockingly, less than 3% of venture capital funding goes to women and other underrepresented groups, which make up approximately 70% of the U.S. population.
A.R.I. prioritizes diversity, equity, and inclusion (“DEI”) in its investment mandate. By creating equal access to capital, A.R.I. aims to “do well while doing good” by unlocking the massive economic potential in underserved segments of the market. To support this effort, A.R.I. launched a DEI Investment Council, a first-of-its-kind initiative that marks a key milestone in reducing the venture funding gap.
While solving multiple pain points for founders, A.R.I. has also been gaining the attention of institutional investors, as A.R.I. targets a nine-figure raise of capital for its Venture Debt Opportunities Fund.
“There was a long period of educating both founders and investors over the past few years to help familiarize them with venture debt, how it works, and its many benefits. The pandemic slowed this learning curve. It was hard to get the message through at times but understanding has steadily increased. Over the past quarter we have seen interest in our strategy grow explosively,” said Zack Ellison, CFA, CAIA, Chief Investment Officer of A.R.I.’s Venture Debt Opportunities Fund.
“Due to inflation and rising interest rates, fixed income has had historically bad performance results recently. This has been the catalyst that has woken up investors to the “A.R.I. Advantage”, providing exposure to innovation as an asset class with safe and consistent double-digit returns and low correlation to other assets. It’s ironic that the long bull market caused many investors to sleep like bears, but everyone is wide awake now,” Ellison smiled.
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