Trust thy lender, but pay

heed to thine term sheet

By RONALD TRAHAN
Medical Device Daily Contributing Writer
BOSTON With venture capital reserves dry-
ing up, many emerging companies are considering ven-
ture debt to extend their runway to a milestone event and
additional, traditional funding. For example, ZipLine
Medical (Campbell, California) just closed a $2 million
venture debt nancing with Western Technology In-
vestment (WTI) (Portola Valley, California).
Unlike conventional bank lending, venture debt
is accessible to startups or emerging companies that do
not have positive cash ows or signicant assets to use
as collateral. Interest rates vary widely from prime plus
2% to prime plus 9%, with the loan term typically rang-
ing from 24 to 48 months. A venture debt lender is also
likely to take a lien against all of a companys assets;
thus, in the event of a default, the venture debt lender
can legally take the entire company.
The venture debt deal also typically includes a
warrant to buy the companys shares, usually 5% to 15%
of the loan amount. Venture debt is available mostly to
companies that have secured at least one round of ven-
ture capital nancing by a recognized venture capital
rm or syndicate of venture capital rms.
We estimate that venture debt represents about
10 to 15 percent of the venture capital dollar amount in-
vested in any given year, and that the known players
total less than 20 lenders, said Maurice Werdegar,
CEO of WTI, the largest and oldest venture debt rm,
which closes about 100 deals a year.
In ZipLines case, both the founder, Amir Bel-
son, MD (Medical Device Daily, March 29, 2012), and
the CEO, John Tighe, have had previous successful re-
lationships with Werdegar and WTI. ZipLine has devel-
oped a versatile noninvasive skin-closure technology
called PRELOC that offers both speed and good
cosmesis, with no piercing of the skin, via a simple,
easy-to-learn and easy-to-use device. ZipLine is target-
ing a $4 billion worldwide market opportunity covering
most surgical procedures involving skin incision.
According to Belson, in selecting a venture debt
partner, the most important thing is the reputation of the
venture debt lender.
The company seeking the money is just look-
ing for a few more months of runway before it achieves
an inection point, Belson told Medical Device Daily.
But there is always the possibility that the emerging
company will need a little more time in reaching that in-
exion point. If that happens, you dont want to be
working with a venture-lending group that is very quick
in panicking, he added.
ZipLine is unusual in that Belson and Tighe
both have outstanding records of achievement that
gives lenders a high level of comfort. Prior to being re-
cruited to ZipLine, Tighe was a director and presi-
dent/CEO of PEAK Surgical (Palo Alto, California),
joining the company as its rst employee in June 2006.
In July 2011, he negotiated the acquisition of Peak by
Medtronic (Minneapolis). Belson was the founder of
NeoGuide Systems (Los Gatos, California), acquired
by Intuitive Surgical (Sunnyvale, California) in 2009.
Belson is also the founder of six other companies in
addition to NeoGuide and ZipLine.
Its all about trusting your venture lender, Bel-
son says. All the venture lenders will tell you that if
your company gets in trouble they will be good part-
ners. Of course, thats not reality.
Number one, by far, is the ne print really
matters, says Werdegar. The horror stories about
venture debt happen when companies sign deals in
which the lender has certain subjectivity in how it can
foreclose upon a company. In deals where the lender
has a subjective default covenant for example, if
your device has been turned down by the FDA at your
PMA hearing is that a default or not? If youre a
lender, you might want it to be, because there might
still be cash in the bank, at which point you can get
your money back. In our deals, and in many other
deals of funds like ours, that event would not be a de-
fault. We have no subjective defaults whatsoever.
I think the reason our rm is so busy, and that
great companies like ZipLine work with us, is because
we do not have those subjective provisions, says
Werdegar. Our best references are from companies
that have actually defaulted with us. A great example is
Emphasys Medical (Redwood City, California), which
was turned down by the FDA for its emphysema de-
vice in December 2009. They had over $10 million in
the bank, and they owed us $10 million at the time that
happened. The company eventually ran out of cash.
We never called the default. We conducted a
sale effort once the board tossed us the keys, and we
were fortunate to nd a buyer for the IP, which was a
company named Pulmonx (Palo Alto, California), which
happened to also be in the emphysema space (MDD,
May 18, 2009).
The short story is that its a beautiful outcome,
Werdegar told MDD. By bolting the Emphasys Medical
device onto the Pulmonx guidance system, you now
have an approved product in Europe that is the leading
therapy for emphysema. Everybody felt great about the
outcome and about how the process went down. The
horror stories about venture debt exist when companies
sign deals for cheap money, at a low interest rate, with
low warrant coverage, without really understanding what
they are signing.
Werdegar cautions companies to abide by the
following three rules. 1) Read the ne print. Under-
stand exactly what the lenders rights are in the deal it-
self. Often they dont show up in a term sheet. 2) Dont
reference-check with the successful companies but
ask the lender to speak with ve companies that have
had problems, where theyve had to restructure their
debt or where there was a default. Those are the refer-
ences to really care about. We were the rst investors
into Facebook with equity and debt in the seed round.
But the references we would give out are those where
companies have hit a bump in the road. NeoGuide ran
out of money and couldnt pay us for seven months. Dr.
Belson witnessed rsthand how we handled that. We
created a heat shield, if you will, protecting NeoGuide
from other creditors. In that period of time they were able
to reconstitute themselves, eventually raised a new ven-
ture round, and had a great exit when the company was
acquired by Intuitive Surgical. All parties involved would
tell you that WTI saved the company. 3) Insist on direct
access to a decision-maker at the lending rm.
Work with someone who is on the credit committee,
who has the authority to work through a problem should
one occur. A lot of these lenders are using sales reps to
sell the venture debt product, so theyre incented to get
the deal done but not to x it if something goes wrong.
Even though we already have equity nancing
in place, the venture debt is a much less dilutive form of
nancing for all our shareholders. It helps us extend the
runway so that ZipLine can reach additional milestones
and an increase in valuation of the company before an-
other round of equity nancing, adds ZipLine CEO
Tighe.
Some venture debt rms are better to work with
than others, Tighe continues. When I was at PEAK
Surgical, WTI was very easy to work with when we hit a
bump in the road. If youre thinking of engaging a ven-
ture debt lender, do your homework. Check references.
Talk to other CEOs who have had supportive venture
debt relationships especially during tough times. And it
goes without saying that careful legal review is neces-
sary, particularly as it relates to the ne print of
covenants.
(Ronald Trahan is president of Ronald Trahan Associates Inc.,
which has been providing public and investor relations services to
big and small companies, private and public, since 1992. rctra-
han@ronaldtrahan.com. ZipLine Medical is a client of the rm.)