We spoke with David Spreng, whom Forbes has ranked 4 times on their annual Midas List of top venture capitalists, on his new company Runway Growth and the state of the market.

Forum: How would you describe Runway Growth?

Spreng: We started the firm in 2016 to provide growth debt capital to both venture-backed (sponsored) and non-sponsored companies in North America. Our typical check size is $5 million to $30 million and we tend to keep our loan size to valuation ratio at under 20%. Companies often use our capital as an alternative or complement to equity and bank debt.

Forum: What led you to found the company?

Spreng: It was a culmination of my background in both venture capital and direct lending. I wanted to offer entrepreneurs a less dilutive alternative to growth equity. Before Runway, I had co-founded Decathlon Capital, which provides revenue-based loans, and it opened my eyes to the opportunity to provide debt to more than just sponsored companies. No one really knows how big the non-sponsored market is, and while the venture debt side has been around for a few decades in various forms, the market is relatively untapped. We think there is a $12 to $15 billion potential market size for venture debt, and right now we are probably at around $3 billion of annual issuance.

Forum: Why isn’t venture debt bigger?

Spreng: It’s a difficult business in that it requires a lot of hand-holding. It’s not something traditional lenders are comfortable with because it often sits at the intersection of traditional debt and venture equity. Monitoring is hard. It requires manpower and a specific skill set. Ares got out of the business and sold their portfolio to Hercules because the monitoring was too onerous. And yet, it is not a big enough market to attract the Goldman Sachs and Carlyle Groups of the world.

Forum: How do you compare to the other venture debt providers?

Spreng: Other firms will have a specific list of investors they lend to, and they will use those names, like Benchmark and Sequoia, as a proxy for their due diligence process. That’s not what we do. Most of our team comes from the direct investing side, so we’re very familiar doing our own due diligence work and getting to know companies and industries. We don’t require a venture sponsor to be involved at all. While we are providers of debt capital, we also bring a unique vantage point to the table having been principal investors on the venture capital and growth equity side as well.

Forum: Do you take an equity position?

Spreng: We do take equity upside with warrants. Since our capital is used to grow enterprises, we like to be aligned with that upside. Two-thirds of our total return comes from our loans’ current income and one third from equity upside. But a lot of our portfolio companies never have exits so we get creative with structuring to make it work for both sides. We’ve done a put on the warrants, a share of revenues or EBITDA, or a contractual IRR amount at the end of the loan. Each loan is different, and we like to think we can create unique loan structures that work well for each one of our portfolio companies.

Forum: When you’re lending to non-sponsored companies, are there particular types companies you avoid?

Spreng: We are relatively industry agnostic, but we won’t do brick-and-mortar retail, restaurants, real estate, or pure people businesses like ad or accounting agencies. We also tend to avoid asset-heavy businesses because the asset-based lenders will serve them better. We like soft monetizable assets in the form of intellectual property like patents, software code, and contracts, which commercial banks often view as worthless collateral.

We’re particularly interested in entrepreneurs who are in overlooked geographies and feel neglected because there is no critical mass of venture or other risk-bearing capital there.

Forum: You recently warned that the market is overheating. Could we be returning to the days of Sequoia’s famous “RIP Good Times” memo?

Spreng: It’s going to be interesting to see how the market evolves as we move out of the top of the cycle. There is a middle market buyout phenomenon going on, and leverage is at a modern high which is concerning. We can’t see the market extending its run any more than 24 months from now. The robust venture funding window will close as will much of lending, and companies with a strong war chest — companies who have “over-capitalized” — will be in better shape.

It’s not quite “RIP” days, not yet, and we don’t anticipate a doomsday scenario, but that advice to raise as soon as possible and as much as possible is quite relevant today.