When does it make sense for a MedTech company to use venture debt instead of raising more equity?

Venture debt is most useful for extending runway between priced equity rounds without incurring additional equity dilution, particularly when the company is confident it will hit a near-term milestone, such as a trial readout or regulatory clearance, that will support a higher valuation at the next equity raise. It is generally not well suited to funding open-ended risk, since covenants and repayment obligations still apply even if the anticipated milestone slips, which can strain the company at the worst possible time.

What are the biggest risks of covenants attached to venture debt?

Venture debt facilities typically include financial covenants and material adverse change clauses that give the lender the right to accelerate repayment or restrict cash use if the company's financial condition deteriorates, such as missing a clinical or regulatory milestone that materially changes its prospects. Because these triggers can occur exactly when the company has the least available cash to repay the debt, unexpected acceleration can force a distressed financing or asset sale, which is why boards should model downside scenarios before drawing a facility.

What is a common mistake companies make when they have access to a venture debt facility?

A frequent mistake is drawing the full available facility simply because it has been approved, rather than only borrowing the amount needed for a specific, well-justified use of proceeds, which results in the company carrying expensive debt service and warrant dilution without a clear return on that capital. Treating an available credit line as free optionality rather than a real financial obligation with covenants attached can lead to unnecessary strain on the balance sheet later.

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Venture Debt

Loan made to a venture-backed company, usually alongside or after equity.

Reviewed by Christian Espinosa, Founder, Blue Goat CyberLast reviewed May 5, 2026

Definition

Venture debt is term debt provided by specialty lenders (SVB, Hercules, Trinity, Western Alliance) to venture-backed companies, typically sized at 25–35% of the most recent equity round, with warrants attached. Venture debt is usually raised alongside or soon after an equity round and includes warrants for the lender. Loans carry interest, fees and covenants, and failure to repay can let the lender take collateral. It is best used to extend runway to a milestone, not to replace equity.

What the regulation says

Venture debt is a financing arrangement, not a MedTech regulatory category. Loan terms, collateral enforcement and lender licensing depend on the contract and applicable jurisdiction; the commonly cited 25, 35% sizing range is market practice, not a regulatory limit. In the United States, warrants are securities. Their offer and sale must comply with the Securities Act of 1933, enacted May 27, 1933, through registration under Section 5 or an available exemption, such as Section 4(a)(2) for transactions by an issuer not involving a public offering. Venture backing alone does not establish an exemption. Accounting requirements depend on the reporting framework. The FASB Accounting Standards Codification became authoritative for interim and annual periods ending after September 15, 2009. Under US GAAP, ASC 470 addresses debt, while ASC 480 and ASC 815 can affect warrant classification and measurement. Depending on their terms, warrants may require liability classification and subsequent remeasurement rather than equity treatment. IFRS 9 Financial Instruments, issued in July 2014 and effective for annual periods beginning on or after January 1, 2018, governs recognition and measurement of financial liabilities, including venture loans. Neither framework prescribes a standard loan size or endorses venture debt as suitable financing.

What this means in practice

Useful to extend runway between rounds without dilution. Risky if the company misses milestones - covenants and material adverse change clauses can accelerate repayment when cash is tight.

Examples

A MedTech startup developing a novel diagnostic device secures venture debt to fund a crucial clinical trial without further diluting early investors.
A company commercializing a surgical robot uses venture debt to extend its cash runway by 12 months, allowing it to hit critical sales milestones before its next equity round.
A venture-backed digital health platform takes on venture debt to accelerate product development and scale its marketing efforts, with the loan structured against its latest Series B equity raise.

Common pitfalls

•Drawing the full facility just because it's available, then carrying expensive debt without a clear use.

Frequently asked questions

Venture debt is usually sized at roughly 25 to 35 percent of the most recently raised equity round and is provided by specialty lenders rather than traditional banks, with pricing that includes an interest rate along with warrants giving the lender the right to purchase equity at a set price, compensating the lender for the additional risk of lending to a pre-profit company. Because it is sized relative to the equity round, venture debt is generally viewed as a complement to an equity raise rather than a substitute for one.

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Category: Investment & Finance
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Updated: 5/5/2026

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Loan made to a venture-backed company, usually alongside or after equity.

·Useful to extend runway between rounds without dilution.
·Risky if the company misses milestones - covenants and material adverse change clauses can accelerate repayment when cash is tight.
·Venture debt is usually raised alongside or soon after an equity round and includes warrants for the lender.

Remember this

Watch out: Drawing the full facility just because it's available, then carrying expensive debt without a clear use.

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