5 Common Venture Debt Myths Founders Still Fall For

Understanding the 5 Venture Debt Myths That Founders Still Believe

Despite becoming a more common financing tool for growth-stage startups across Europe, venture debt remains widely misunderstood. Many founders still hesitate to consider it seriously, largely due to outdated or misguided beliefs about how it works, what it costs, and when it should be used. These misconceptions can delay access to strategic capital at a critical time—often when speed, runway, and minimal dilution matter most.

Venture debt is a form of non-dilutive financing designed specifically for venture-backed companies. It typically takes the form of a term loan and is structured to complement, not replace, equity financing. Unlike traditional bank loans, venture debt providers assess a startup’s potential based on venture capital backing, recurring revenues, and growth trajectory—not just historical profitability or assets.

In the last few years, venture debt has gained serious traction in the European startup ecosystem. According to data from Startbase and insights from the High-Tech Gründerfonds, an increasing number of high-growth startups are leveraging venture debt to extend runway, fund product development, or bridge to a larger equity round. Yet, even with its rising adoption, many founders still believe myths that prevent them from tapping into this valuable resource.

These myths often stem from comparisons with either traditional bank lending or venture capital models—both of which operate under different incentives and risk profiles. Understanding what venture debt actually is (and isn’t) is the first step toward using it strategically. In the next section, we’ll unpack the five most persistent venture debt myths and reveal what founders really need to know.

Benefits and Risks

Venture debt can be a powerful financing tool—when used strategically. Yet many founders either overestimate its dangers or underestimate its advantages. Here’s a clear breakdown of the benefits and risks you should understand before deciding if venture debt is right for your startup.

Key Benefits

• Non-Dilutive Capital: Venture debt offers access to capital without giving up additional equity. For founders aiming to retain control and maximize long-term ownership, this is a significant advantage—especially between equity rounds.
• Runway Extension: By adding debt to your capital stack, you can extend your runway without rushing into a down round. This gives your business more time to hit key milestones and command better terms in future funding rounds.
• Signal to Investors: When top-tier lenders back your company with venture debt, it sends a market signal of credibility. It shows confidence in your growth potential and financial discipline.
• Flexibility: Many venture debt facilities come with interest-only periods and flexible repayment terms, making them more startup-friendly than traditional bank loans.

Key Risks

• Repayment Obligation: Unlike equity, venture debt requires repayment—regardless of how your startup performs. This can put pressure on cash flow, especially if revenue projections fall short.
• Covenants and Restrictions: Some loan agreements come with covenants that restrict strategic decisions, such as future fundraising or M&A activity. These constraints can limit your agility in a fast-moving market.
• Collateral Requirements: While not always the case, some lenders require warrants or liens on assets—adding complexity to your cap table or potential liabilities in liquidation scenarios.
• Not Ideal for All Stages: Early-stage startups with limited revenue traction or unstable business models may find it difficult to secure venture debt or meet repayment terms without undue risk.

Venture debt isn’t inherently good or bad. It’s a financial instrument—and like any instrument, its effectiveness depends on how and when you use it. For more insights into financing tools and investor-ready strategies, explore resources like Startbase or High-Tech Gründerfonds. At TULA, we help founders align financing choices with long-term goals—without falling for myths or market noise.

Applications in Practice

To better understand how venture debt fits into the financing toolkit for startups, it’s helpful to look at real-world use cases. These examples debunk common venture debt myths and showcase how founders are successfully leveraging this financial instrument.

1. Fueling Growth Without Dilution: The Mobility Startup Case

A fast-scaling German mobility startup, already backed by a tier-1 venture capital firm, faced the classic dilemma: raise more equity and dilute or find an alternative. Instead of another equity round, the company turned to venture debt through a reputable European debt fund. With an additional €5 million in non-dilutive capital, they accelerated their fleet rollout across three new cities. This case directly challenges the myth that venture debt is only for companies in distress—it empowered aggressive expansion while preserving cap table integrity.

2. Extending Runway Ahead of a Series B

A Berlin-based SaaS startup nearing profitability used venture debt to bridge the gap between their Series A and a planned Series B. Rather than rushing into the next equity round at a suboptimal valuation, they secured €3 million in venture debt via a combination of mezzanine and revenue-based lending. This approach extended their runway by 12 months, allowing them to strengthen ARR and close a Series B at a 2.3x uplift in valuation—directly dismantling the myth that venture debt is a last resort.

3. Strategic Use with Public Funding Instruments

Some startups are combining venture debt with public funding schemes to optimize capital structure. For instance, founders have layered venture debt on top of early grants from EXIST or growth-stage support from the High-Tech Gründerfonds (HTGF). In one such case, a deep tech startup in Baden-Württemberg extended its technology development cycle without issuing additional shares. This hybrid model addresses the myth that venture debt isn’t compatible with public grant structures.

4. E-commerce Scale-Up Improves Unit Economics

An e-commerce scale-up operating in Austria and Germany was experiencing strong topline growth but needed capital to build inventory ahead of the holiday season. A structured venture debt facility enabled them to bulk purchase key SKUs at lower cost per unit, improving gross margins by 6%. The loan was repaid within six months from seasonal revenue, demonstrating venture debt’s flexibility for short-term working capital needs—debunking the idea that it’s only suitable for long-term risks.

5. International Expansion with Investor Support

Expanding into new markets can be capital-intensive. A healthcare AI venture based in Munich used €4 million in venture debt to launch operations in the UK, while leveraging its Series A investors’ network for on-ground support. The strategy enabled them to prove product-market fit in a second geography, setting the stage for a robust Series B. This example takes aim at the myth that venture debt providers aren’t aligned with equity investors—many investors now advocate for thoughtful use of venture debt to unlock strategic milestones.

These stories show that when venture debt is thoughtfully applied, it becomes a powerful lever—not a financial crutch. Founders who understand its strategic potential are already using it to scale smarter and faster.

Key Considerations Before Taking on Venture Debt

While debunking venture debt myths is a critical first step, making informed financing decisions requires founders to go deeper—understanding what truly matters when evaluating venture debt options. Not all debt is created equal, and not every founder will benefit in the same way. Here’s what you need to consider before signing on the dotted line.

1. Align Debt With Milestone-Based Outcomes

Venture debt works best when it serves as a bridge to a clear, near-term milestone—like a product launch, customer acquisition targets, or your next equity round. If you’re unsure how the capital will accelerate you toward measurable growth, you may be borrowing prematurely or inefficiently. Be honest about your burn rate and revenue runway, and project whether the debt will yield a return on growth before repayment cycles kick in.

2. Scrutinize Loan Terms Beyond Interest Rates

Founders sometimes fixate on interest rates, but hidden costs often lurk in the fine print. Warrant coverage, fees (origination, legal, or prepayment), covenants, and default clauses vary broadly across lenders. Ensure you understand how performance covenants could restrict business decisions—especially during volatile quarters. Consider engaging an advisor to benchmark term sheets and negotiate terms that support, not hinder, your company’s strategy.

3. Vet the Lender’s Reputation and Value-Add

Just like with VCs, not all lenders offer the same level of partnership. Some debt providers bring sector expertise, introductions to downstream investors, or even co-investment capabilities. Others may be transactional with minimal long-term engagement. Look for lenders with a history of supporting early-stage companies through both high-growth phases and challenging periods. Tools like Startbase can help you research lender credibility and past deal activity in the DACH startup ecosystem.

4. Understand Exit Implications

Taking venture debt impacts cap table dynamics and potential exit scenarios. While it may be non-dilutive up front, attached warrants still result in equity dilution upon conversion. Moreover, during an acquisition or IPO, outstanding debt must be handled—affecting valuation negotiations and deal complexity. Make sure to model these long-term impacts with your CFO or financial advisor.

5. Don’t Use Debt to Cover Structural Weaknesses

Perhaps the biggest pitfall: using venture debt as a lifeline when the core business isn’t working. Debt assumes underlying unit economics that scale. Raising more capital won’t fix poor retention, weak margins, or lack of product-market fit. In these cases, venture debt can compound financial fragility. Instead, use it when the fundamentals are strong—and capital is a growth engine, not a crutch.

Ultimately, venture debt is a powerful tool when used strategically. To avoid costly missteps, work with a trusted advisory like TULA that understands the nuances of financing structures and can connect you with the right lenders for your stage and sector. Thoughtful planning today will protect your growth trajectory tomorrow.

How TULA Cuts Through the Noise of Venture Debt Myths

When it comes to venture debt, timing, alignment, and expertise matter. At TULA, we specialize in helping startups navigate the complexities beyond the myths—bringing tailored financing solutions that complement your growth trajectory, not compromise it.

Speed to Capital: We understand how critical speed is in scaling a business. Our deep network of trusted lenders and institutional partners across Europe means we can move fast—often helping startups secure term sheets within weeks, not months. While others are still discussing options, you’ll be deploying capital.

Precision Matching: Not every lender fits every stage or sector. Our unique advisory model combines deep market intelligence with hands-on experience to ensure we match you with the right debt partners—those who understand your business model, risk profile, and long-term vision. No more endless meetings with the wrong investors.

Structuring & Negotiation Support: Venture debt can be powerful—if structured correctly. We stand by you through every clause, bringing decades of combined experience in cap table modeling, covenant analysis, and deal term optimization. Our guidance helps you avoid founder-unfriendly terms and ensures the debt acts as a growth lever, not a burden.

Whether you’re expanding internationally, extending runway before your next equity round, or simply exploring non-dilutive options, TULA is here to help you make strategic, data-backed decisions. Learn more about the venture debt landscape and startup financing options through resources like European Investment Fund, EU Access to Finance, and High-Tech Gründerfonds.

Ready to cut through the myths and find the venture debt that fits your startup? Let’s talk.