Venture Debt: Leverage For Enhancing Venture Capital Returns

November 5, 2021 12:20 pm

As the American comedian Bob Hope once quipped: “A bank is a place that will lend you money if you can prove that you don’t need it.” His words ring especially true in venture capital circles.

In the simplest form, any investment into a business can be defined through a price-to-earnings (P/E) multiple, and the return generated between entry and exit can be traced back mathematically to a change in the following four fundamental factors: revenue expansion, margin expansion, multiple expansion and leverage. Most private equity strategies and business models revolve around a combination of these factors. For example, returns in classical leveraged buyouts are driven by margin expansion and leverage as the new private equity owners would strive to ruthlessly optimize costs and the capital structure of the acquired business.

Read more in an article by Flashpoint General Partner Michael Szalontay for Forbes Finance Council.