There are many ways for young companies to get fresh money. Although venture debt is currently rather unpopular in Europe, it can be a cheap way for startups to raise new capital.
Venture debt capital as an important capital supplement
Young companies usually rely on the participation of investors in the course of several equity rounds. Venture debt serves as a supplementary financing option that enables startups, especially in the early stages, to remain liquid between financing rounds. In contrast to venture capital, in which the lenders mainly acquire shares in the company and actively influence the business process, venture debt serves more as supplementary capital, in which lenders do not receive any shares or intervene in the business process. The borrowed capital usually already earns interest and is repaid within 18 months. The companies that choose venture debt often have already achieved a certain market position and are looking for additional capital to finance growth initiatives such as expansion into new markets or the development of new products. Venture debt lenders are typically specialist financial institutions or banks that specialize in financing startups and fast-growing companies. Silicon Valley Bank, now owned by US deposit insurance, pioneered venture debt in California’s thriving tech industry.
Venture debt rather unpopular in Europe
With venture debt, companies have the advantage that they can obtain additional capital without having to give up further equity shares. The company management remains in the hands of the founders. In addition, it can be advantageous for companies that the interest rates for venture debt financing are usually lower than for equity investments. However, companies must also consider that venture debt financing requires timely repayment of loans, which can place an additional burden on the company. Collateral must also be provided for the loans, usually in the form of pledges, IP rights or assets. As the online portal t3n reports, financing with venture debt is mainly in the order of between three and 50 million euros. However, the financing instrument currently does not play a major role for young European companies. The European Investment Bank estimates the share of venture debt financing in Europe at only around three percent of the annual risk capital volume. In the USA, on the other hand, the proportion is estimated at around 15 percent.
Startup funding collapses in 2023
The turnaround in interest rates and global economic uncertainty are leading to greater reluctance on the part of investors. The start-up boom, which to a certain extent was also due to the cheap money of recent years, seems to be over for the time being. The collapse of Silicon Valley Bank in early March, triggered by the panic withdrawal of bank deposits, has further complicated the financing environment for startups. According to a report by the startup database Crunchbase, global startup financing with venture capital fell by 53 percent in the first quarter of 2023 compared to the same quarter last year to USD 76 billion. The slump would have been far more drastic without Microsoft’s $10 billion investment in OpenAI and fintech Stripe’s $6.5 billion funding round. In Europe, venture capital funding plummeted 66 percent from the same quarter last year, to $10.6 billion in the first quarter of 2023. According to Crunchbase, US investors, who are instrumental in European venture capital funding, are increasingly withdrawing from Europe.
Editorial office finanzen.net
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