Is it me, or are we seeing a lot more venture finance deals these days? Web 1.0 holdover Cooking.com is the latest to jump on this bandwagon. It just took out a $7 million loan from ORIX Venture Finance. The ten-year-old dotcom—which is basically a shopping portal for cookware—is one of the early Idealab companies that is still around.
Whenever I see a venture debt deal, I wonder why the company couldn’t get regular venture capital or find another source of funding. Did they get a better deal through the bank loan or could they not find any other takers? With a “startup” this long in the tooth, I suspect it is the latter. I am not familiar with the specifics of this deal, but it is common for venture debt to be structured as a convertible loan, meaning that the lender can convert the loan into stock at some point in the future. [I didn't get this quite right, see update below]. Sometimes these are treated as bridge loans with the hopes that an IPO will make converting the loan worthwhile. If Cooking.com is indeed considering the IPO route (again, pure speculation here), it would be well-advised to radically reinvent itself first. The public markets are not too receptive to Web 1.0 retreads right now (see Classmates.com’s flubbed IPO attempt).
As Allen Stern at CenterNetworks points out, perhaps Cooking.com can use the funds for a much-needed facelift. It could definitely use more content and community features baked right into the main parts of the site, instead of shunting them off to a separate forums tab. When people want to learn about cooking, it looks like content-heavy sites like the Food Network or AllRecipes are more popular destinations:
Update: I’ve been getting comments and e-mails about my characterization of how venture debt works. Apparently, it is not common for venture loans to be convertible to stock, but they often do have extra warrant provisions that allow the lender to invest in future rounds (for equity) alongside other investors. Brightcove CEO Jeremy Allaire clarifies the issue in an e-mail:
Venture Debt is definitely a booming sector right now, much to the chagrin of traditional venture capitalists. Venture Debt offers growth companies the ability to get access to capital without having to give up equity in their companies.
On the other hand, venture debt is essentially a bank loan, with terms that most unprofitable and early stage businesses could never get from traditional banks.
In your post, you suggest that Venture Debt is somehow not as good as venture capital. To the contrary, not only is it potentially better (e.g. you don’t give up ownership and control provisions in your company), it is actually much harder to get than a venture capital investment. Because venture debt is more like a bank loan, venture debt investors are much more scrupulous about who they will provide loans to, and most often are looking for investments in companies who already have a lot of capital/cash and have a very high likelihood to pay that back over 36 months. A startup without any meaningful cash on their balance sheet or growth in revenue would find it extremely difficult to get venture debt.
I stand corrected.