When Vistara was founded 10 years ago as a spinout from a family office, its investment strategy was developed around three core tenets: Security, Yield, and Upside.
Today, we’re focusing on the first — Security.
Security is analogous in the private credit world to the notion of principal protection. And after 10 years — with zero losses across 40+ investments — we can proudly say we’ve remained true to this core tenet. As Warren Buffett famously said, there are only two rules in investing: Rule #1 – Don’t lose money. Rule #2 – Don’t forget rule #1.
Even before we get to the formality of taking security, it starts with applying a responsible amount of leverage to a growth-stage business — so that ideally, we never have to rely on these provisions. Our lending levels tend to land in the 10% to 30% total debt-to-enterprise value range. In other words, the companies we invest in are worth at least 3x (and usually much higher) the value of their total debt.
Furthermore, the “enterprise value” in our equation is based on our own realistic valuation of the company — not just the latest mark from the last VC round. This ensures the right level of “air cover,” as we call it, if the company ever had to sell. It also promotes alignment with equity holders, preserving enough value for all parties and empowering boards and management teams to make both strategic growth, or in some cases if growth has stalled, more difficult decisions with confidence.
We often get asked:
What does it mean to take actual security on a software business, given the lack of hard assets that typically underpin traditional lending?”
It’s a fair question, and we often hear comments like, “Well, the assets walk out the door every night,” or “What are you actually securing against?”. In enterprise value lending — which is essentially what we do — as opposed to asset-based lending, we take a General Security Agreement on the company and any subsidiaries. This includes customer and operating contracts, as well as intellectual property. Because we invest in companies with $10M to $100M of ARR, the concept of general security has real value — unlike in early-stage startups, where many of those “assets” are yet to prove their worth.
Looking back over the past decade, we’re also proud to say the majority of our investments have been made in conjunction with many of the leading technology bank lenders — partnerships that have remained strong even post the regional banking crisis. Working on a senior (bank) and junior (Vistara) basis isn’t always easy, but banks increasingly look to us as a partner they can rely on when a company’s needs go beyond their own lending comfort levels. We also credit the work of several top law firms we’ve partnered with — who help navigate complex agreements and cross-border jurisdictions, as many of our companies operate internationally.
At Vistara, we’ve long believed that while banks are great at providing working capital, firms like ours play a critical role in providing growth capital — as a complement or as an alternative to equity. In frothy markets where banks may overextend or equity overpays, the swimlane where we operate can narrow. As we sit here in today’s environment, the funding gap has never been wider.
Even when various options exist, founders and early investors have also become far more aware of less dilutive options such as Vistara’s growth debt and convertible debt structures – as we will discuss in upcoming posts.
Our core investment team (some of whom you will meet in subsequent posts) works diligently on implementing this primary tenet of our investment strategy as we underwrite new deals and manage the existing portfolio to ensure that we can still claim to be following Buffet’s Rule #1 over the next 10 years.
Next Up?
Now that we’ve covered the downside while providing patient capital to support growth, how do we:
- Get paid to wait , and
- Share in the upside?
In our next post, we’ll dive into the other key pillars of our strategy: Yield and Upside.
Looking for Flexible Growth Capital?
Read our case studies to learn how our growth debt and equity solutions have enabled our founders and helped our portfolio companies.
