Venture capital (VC) money can enable a construction firm to scale into new markets, hire fast, and bid on bigger projects. But that same capital structure can pose challenges when it’s time to secure performance and payment bonds. Sureties don’t underwrite hype or growth. They underwrite capacity, character, and capital as documented in conservative, construction-specific financials. The very nature of venture capital backing can spook sureties.
Surety Bond Professionals is a family-owned and operated bonding agency with over 75 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
Why are sureties leery of VC-backed construction firms?
These venture capital characteristics underlie the obstacles construction firms may encounter when applying for various types of construction bonds:
- Complex ownership and priority rights. Preferred shares, redemption rights, liquidation preferences, and investor vetoes can put the surety behind other claims or make decision-making slow in a crisis. If a job goes sideways, a surety needs fast authority to act; complicated governance slows that down.
- Debt-like investor instruments. Shareholder “notes,” revenue share agreements, or convertible instruments can drain working capital through fixed payments or create uncertainty around who gets paid first. Sureties treat that as leverage, not equity.
- Exit timelines. Funds have a clock. If the investor expects a sale in 2–4 years, the surety worries about continuity of management, indemnity after a change of control, and whether earnings will be used to support the bond program.
- Siloed entities. Creating project-specific LLCs or holding companies can isolate risk for investors, but it also isolates assets from the surety. A shell entity with no working capital won’t support sizable single or aggregate bond limits without heavy conditions.
What do sureties actually want to see?
VC-backed construction firms may have trouble showing sureties what they really want to see:
- GAAP (preferably audited) financials by a construction-savvy CPA. Reviewed financials may work for smaller amounts, but audits unlock larger bonding capacity. The work-in-progress (WIP) schedule must be accurate, tied to the general ledger, and reflect percentage-of-completion under ASC 606.
- Strong working capital and tangible net worth. Shareholder loans and fancy instruments don’t count. Sureties focus on current ratio, quick ratio, leverage, and the quality of receivables (aging matters).
- Consistent gross margins and good WIP hygiene. Chronic underbillings, fading margins, or heavy retained earnings “locked” at a holding company are all red flags.
- Clean indemnity. Sureties are looking for corporate indemnity from the operating company, plus personal indemnity from owners who control the business. With VC structures, the “owner” is often a fund that won’t sign personally, so the surety needs compensating strengths.
- Bank support. This includes an accessible working capital line, reasonable covenants, and no liens that prime the surety.
Which bonds are hardest for VC-backed firms to secure?
Sureties may hesitate to issue large bid bonds if the firm’s capital structure is complex or investor-controlled. Before bidding, confirm that indemnity, liquidity, and authority to sign bonds rest with the operating company.
Performance bonds test a company’s ability to finish jobs under stress. If the surety sees investor exit timelines, restricted cash, or weak WIP reporting, they may require collateral or limit job size.
Sureties look closely at payment practices. VC-backed firms that burn cash fast or rely on capital calls for payroll may trigger additional scrutiny. Transparent payables reporting and strong banking relationships can mitigate these concerns.
How to build a bondable VC-backed company
There are some measures VC-backed contracting firms can take to dispel some of the doubts sureties may have about issuing construction bonds to them:
- Step 1: Hire a construction-focused CPA who can produce the timely audited/reviewed statements, strong WIP schedules, and cash-flow statements that sureties like to see.
- Step 2: Don’t let sales outrun field capacity. Cap single and aggregate exposures to what your supervision, subs, and cash flow can realistically support.
- Step 3: Avoid covenants that block bonding or give the lender a first-priority claim on job proceeds without surety consent.
- Step 4: Document estimating gates, change-order tracking, buyout milestones, and subcontractor prequalification. Bring your controller or CFO to meetings with the surety as credibility matters.
- Step 5: Negotiate the term sheet with bonding in mind. Before you sign, loop in your surety agent. It’s far easier to add bonding-friendly covenants up front than to re-trade later.
- Step 6: Subcontractor Default Insurance (SDI) can complement (not replace) bonds, especially for large contracting firms. But be aware that SDI requires robust subcontractor risk management and impacts cash flow differently than bonded subs.
The bottom line
Venture capital can help you grow. But bonding capacity is earned through discipline, transparency, and cash left in the operating company. That’s best accomplished by building the financial foundation and governance trusted by sureties. Learn how insurance market changes also impact bonding programs in our companion article How Rising Insurance Costs Affect Construction Bonding Limits.
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Frequently Asked Questions
Can I get sizable bonds if my investors won’t give personal indemnity?
Yes, but expect conditions: collateral (often an LOC), corporate/parent guarantees, tighter single/aggregate limits, and possibly funds control. Deliver clean results and retain earnings to ease those conditions over time.
Our VC fund requires quarterly distributions. Is that a deal-breaker?
Not necessarily. Create “bonding carve-outs” that preserve minimum working capital and net worth at the operating company when bonded backlog exceeds a threshold. Sureties care less about distributions and more about liquidity when jobs need it.
Will SDI let me avoid bonding altogether?
No. Project owners still require performance and payment bonds on many jobs. SDI is a subcontractor-default tool for the prime contractor. It complements bonds but doesn’t replace the owner’s security.
Do we really need audited financials?
For modest programs, reviewed financial statements may be acceptable to a surety. To unlock larger single/aggregate limits, audited GAAP statements with solid WIP schedules are the gold standard.
When should I bring the surety into the conversation?
Early, before signing a term sheet or bidding on your first bonded job. A good surety agent can align investor structure, banking, and bonding, so you’re not reinventing it mid-project.
