Venture debt is like a delicious sandwich that only costs ten cents, but occasionally explodes in your face. If I were running a startup, I don't think I'd ever take it.
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The portfolio effect should make me *want* founders to make risky moves like taking venture debt.
I disagree and you do too. Debt adds great risk without great upside. Follow on equity investments de-risk while maintain or increase upside. Suppose you're investing in Facebook and you see it's going really well and Zuckerberg says he wants to take on some debt.
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No rational founder would incur the additional risk of taking debt without corresponding upside potential.
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I think that’s *the* point: the upside of taking debt is mostly the founder’s, because she gets to keep her equity. She only gets more and more diluted with addtl equity rounds, whereas other investors usually do their pro-ratas.
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As an investor, you know that if he takes on debt, there's a chance your investment goes to zero. If he takes on more equity you get $750 million instead of a billion.
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The chance of a startup going to zero is much higher when taking on more equity — at higher valuations — compared to taking on venture debt. Debt causes all sorts of problem, but it is more conservative than equity.
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