Continued - Reflections on How Ventures Should Approach Debt

This article is the January 30th entry for the 10X New Year Blog Relay 2026.

Around 2023, I wrote a note on how ventures should approach debt in the following article, but since the environment has changed significantly compared to that time, I would like to provide an update.

From around 2021, the supply of venture debt in Japan had been on an upward trend, but entering the latter half of 2025 and 2026, I feel that a clear shift in trends has begun, such as rising interest rates on venture debt and startup debt, as well as stricter lending criteria and tightening, due to the impact of the macro environment, including the rise in long-term interest rates in Japan.

Given these environmental changes, while many companies previously seemed to have a stance of borrowing as much as possible as startups regarding venture debt, I believe we have now entered a phase where we need to think more carefully about how to use it, as well as the amounts and conditions. I am writing this note in the hope that it will serve as a useful perspective for such considerations.

When thinking about debt as a startup, I believe it is best to categorize it into three types based on the company's stage and purpose.

1. J-Curve Deficit Phase: Equity-Linked Debt

“Buying future time while net assets are at their thickest”
For ventures in a phase where they are prioritizing growth while still digging into deficits, the iron rule is to execute debt in tandem with equity financing.

The purpose of using debt in this phase is to “pad” the equity financing amount, thereby suppressing dilution from equity financing and increasing the absolute amount raised, which adds depth to the amount of capital available for investment in growth.

The ideal timing for execution is immediately after equity financing. By targeting the timing when banks can evaluate the company as “having the most accumulated net assets and the lowest bankruptcy risk,” it becomes easier to secure favorable conditions.

As for the repayment period, it is essential to aim for a long term of 3 years or more (although negotiations will be tough) (if it is less than 3 years, there is a concern that repayment will come before the next equity financing, making it difficult to allocate to aggressive growth capital).

The point to be careful about with this type of debt financing is discipline in the financing amount. While individual circumstances must be considered, as a guideline, a debt-to-equity ratio of 6:4 or 7:3 relative to the most recent equity financing amount is ideal. At first glance, it may feel like the larger the debt financing, the better, but undisciplined debt financing creates risks such as “deterioration of Net Burn due to a huge interest burden” and “increased difficulty in future equity financing to cover the burden of debt repayment.”

For example, if a startup with an MRR of 150 million yen and a Net Burn of 100 million yen raises 2 billion yen in equity at a valuation of 10 billion yen, and then also raises 2 billion yen in debt (a 5:5 ratio), assuming a venture debt interest rate of 8%, an annual interest burden of 160 million yen (13 million yen per month) will occur. This is by no means a small number, as it increases Net Burn by more than 10%, and at the time of repayment (unless the company has managed to become profitable), it will be necessary to prepare the previous equity financing amount just for debt repayment in the next equity financing (and since VCs want to invest in growth capital, they tend to dislike capital increases where debt repayment is the main purpose). You can see how a 5:5 financing with high-interest venture debt weighs heavily.

At first glance, venture debt feels like a pure bargain by padding the financing amount, but the use of debt without discipline can become a doping agent that makes future cash flow painful. It is important to use it with appropriate discipline within a range that does not become a burden for the next equity financing (while also assuming downside scenarios).

2. Bridge Phase: “Buying Time” to Improve Valuation for the Next Equity Round

“Minimizing dilution and proving the angle of growth”
Venture debt can also be used as a strategic bridge to enter the next large equity round advantageously.

For example, in a situation where extending the runway by a few months would allow for business growth and enable more advantageous equity financing, it is used to temporarily extend the runway with debt and aim for equity financing at a higher valuation.

The repayment period for this type of debt can be short-term (about 6 months to 1 year). (Since net assets and cash on hand have been somewhat depleted by this point, and the financing occurs in a phase where financial risk is not low,) the interest rate will be higher, but it has the advantage of suppressing dilution. As a prerequisite for borrowing from a bank, it is important that the probability of the next equity financing is extremely high.

As for the economic calculation, compare the “interest cost of debt” with the “dilution cost if the current round is rushed.” For example, even if a company with a Net Burn of 100 million yen pays 10% interest (= 30 million yen in interest costs for 6 months) for 600 million yen = 6 months of life extension, if extending the runway by half a year can increase the valuation by 20% (the financing amount can be increased by 20% even with the same dilution ratio; if it is a 100 to 120 billion yen valuation increase, you can raise 400 million yen more with 20% dilution), it might be judged that the return on using debt is sufficiently greater (400 million yen in excess equity financing for 30 million yen in interest costs).

3. Profitability/Stable Growth Phase: Optimization of Capital Cost

“Graduation from venture debt and transition to leverage”
Up to this point, I have explained debt for ventures in the deficit/J-curve phase (the source of repayment is basically the next equity financing). However, once profitability is in sight, the company enters a phase where it can prove its repayment ability through operating CF or FCF. Here, the company will step out of the “startup” framework and pursue capital efficiency similar to that of a general company.

The objective is to reduce the cost of capital (WACC) by refinancing from high-cost venture debt to low-cost proper loans, and by pursuing an appropriate D/E ratio. Since this can be considered separately from equity financing, it is advisable to form an appropriate portfolio by combining a mix of short-term and long-term repayment periods.

Regarding the amount of financing, using a general D/E ratio as a discipline (the difference from Phase 1 is that equity is viewed as net assets rather than the amount raised), it is often manageable to increase the debt ratio to 1-2 times the equity ratio (assuming that sales and profits are growing steadily).

Since the source of repayment for this type of loan is generated from the business's own cash flow, it is possible to build a robust financial structure that is not swayed by changes in the external financing environment (such as down-round risks).

Since such negotiations take a certain amount of time, I believe it is best to start discussing the switch to these proper loans with banks early on, at the timing when the probability of becoming profitable has increased.

The landscape for venture debt is still evolving day by day, so I hope we can continue to update the optimal usage methods while consolidating everyone's insights.

Please feel free to contact me if you have any questions.