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03.3

Venture Debt

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Venture Debt Data Challenge

Innovation takes ingenuity and capital. Much attention has been given to the increase in equity available for companies in Europe. However, given the rise in discussions around Venture Debt and the lack of data around the topic, we decided to explore the role of debt in the European venture ecosystem.

Even in a time of abundant cash, debt can be an attractive financing option for venture-backed companies looking for alternatives to equity financing. Debt comes with the need for repayment but by blending debt and equity, companies can form their optimum financing solutions.

There is no comprehensive data on the European market for Venture Debt. Silicon Valley Bank prepared an estimate market size based on a range of data sources and a top-down analysis. Fundraising based on publicly available data was used to estimate annual run rate for new commitments over time. This was supplemented with EIB lending data in the Venture Debt space based on public announcements, as well as Silicon Valley Bank's own lending activities based on internal data. To account for other active participants, the data was grossed up by c.15%. The estimate for 2020 was compared to the European Investment Bank ('EIB') research completed in 2019 which indicated that 5% of the financing in Europe came from Venture Debt, further validating our market size estimate. The data for 2010 is based on the BVCA Rise of Venture Debt report from 2012.

Data is scarce but over the last 10 years, SVB proprietary market data estimates venture debt activity in Europe has increased by 6-8x, suggesting a market estimate of $1.5B in 2020.

Estimated run rate of Venture Debt ($M) at 5 year intervals

Note:
Silicon Valley Bank proprietary market data estimates include only term debt from early-stage venture through to mezzanine for venture-backed technology companies.

Although modest, the relative share of venture debt financing has also increased as a share of capital raised for rounds below $100M in Europe from 2% in 2015 to 6% in 2020. For comparison, in the US where the market is most mature, approximately 16% of all financing is venture debt. At current equity levels, this would suggest $4B capacity per annum.

Venture debt financing as % of venture financing in Europe for deals <$100M

Legend

  • Venture debt financing
  • Equity financing
Note:
Silicon Valley Bank proprietary market data estimates include only term debt from early-stage venture through to mezzanine for venture-backed technology companies.

Within the investor community, there is a growing awareness of debt. Amongst VCs surveyed, 55% are either advocates for the use of debt or are invested in companies that have already taken on debt financing. This percentage doesn’t vary based on the VCs' stage of focus.

Is debt part of your capital financing plans for your portfolio companies?

Source:
Note:
VC respondents only. Numbers may not add up to 100 due to rounding.

According to our survey, VCs who focus on later stage investments more often indicate debt as a part of their portfolio's capital financing plans.

Is debt part of your capital financing plans for your portfolio companies?

Source:

Legend

  • Yes
  • Unsure
  • No
Note:
VC respondents only.

Venture debt is a loan most often secured at the same time or soon after an equity round – and is typically used to compliment equity and extend runway. In fact, 74% of VCs mentioned advising their portfolio companies to take debt for that specific use case. Reducing the costs of shareholder dilution for future rounds is the second most cited reason. It can also benefit start-ups in other ways by reducing the average cost of capital to fund operations when a company is scaling quickly or burning cash. It also provides flexibility to accelerate growth as opportunities arise over the life of the financing round.

Why would you advise your portfolio companies to take debt/venture debt?

Source:
Note:
VC respondents only. Numbers do not add to 100 as respondents could select unlimited options.

“In our situation, we view venture debt as a cost-effective component of our capital structure. Venture debt can be a very flexible, non-dilutive, way to extend your cash runway and time between equity rounds, which is particularly valuable in periods of high growth, to allow you to maximize your valuation between rounds.”

Ken MacAskill

Snyk

CFO

Debt financing can operate as a helpful non-dilutive supplement to equity in fuelling growth. Beyond helping us accelerate our rapid growth, debt financing can also be beneficial in bridging a gap between larger equity financing events.

Peter Holten Mühlmann

Trustpilot

Co-Founder & CEO

VCs' & Founders' Familiarity with Venture Debt

Although VCs are much more knowledgeable on the topic, only 19% of founders mention being familiar and fully understanding of the lending options available. Investors will gain experience across broader portfolio companies while founders will have more limited first-hand experience. Therefore, understanding of debt options is unsurprisingly better for repeat founders with significant experience scaling businesses, with 27% reporting being well-versed on the topic and 53% being familiar but requiring more research.

How familiar are you with the different debt solutions available for high growth businesses? (e.g. invoice financing, venture debt, growth lending, working capital, mezzanine)

Source:

Legend

  • Aware but don’t understand debt products
  • Familiar but need to do more research on lending options
  • Familiar and fully understand the lending options available in the market
  • Not familiar
Note:
Founders respondents only.

Only a few founders (6%) are not familiar with venture debt enough to provide an opinion. The overall perception from founders towards borrowing capital is neutral, with 42% taking this stance. However, founders gain more positive sentiment with experience. 38% of repeat founders with significant experience selected “rather positive” and only 17% selected "rather negative," which is materially lower than for first-time founders.

What is your overall perception of debt?

Source:

Legend

  • Rather positive
  • Neutral
  • Rather negative
  • Not sufficiently familiar with debt to comment
Note:
Founders respondents only. Numbers may not add up to 100 due to rounding
.

Founders who are most familiar with venture debt are significantly more likely to have a positive perception of it and the inverse is true as well. This points to a negative bias toward venture debt for those less informed on the topic.

Impact of familiarity on overall perception of debt

Source:

Legend

  • Rather Positive
  • Neutral
  • Rather Negative
Note:
Founders respondents only, excluding those not sufficiently familiar with debt to comment.

For those with a more negative perception of venture debt, 38% selected either consequence of default and lender attitude in a downside scenario as the main causes for concern. In practice, venture debt is typically free from covenants but it may vary between debt providers. It is worth noting that with asset-light business models, value is greatest with the business as a going concern, and therefore lenders are motivated to work closely with investors and founders in a downside case.

Founders: Why is your overall perception of debt negative?

Source:
Note:
Founders respondents only. Subset of respondents who selected "rather negative" for their overall perception of debt.

Whichever debt financing option is most suitable for your company, timing is key. Earlier stage businesses will get the most attractive offers from lenders when they have just raised equity and therefore have cash and are less risky. As such, companies may want to explore debt finance when times are good, and they have a lot of cash runway as they will get better offers from lenders. Businesses should avoid waiting to approach lenders when cash is low or they are wanting a cash “bridge”, as lenders may then decline or charge a higher price due to the increased risk profile.



Companies should also check each term lender’s offer carefully and avoid restrictive items such as covenants set at a level the company is unlikely to achieve, or very high “success fees” payable at exit. Rather than comparing just headline interest rates, companies should compare all terms between competing debt providers to calculate an overall cost of capital which includes arrangement fees, early repayment fees, exit fees, non-utilisation fees etc.

Whichever debt structure you opt for, it’s vital to take references on lenders from your Board or advisors and choose a lender who will add value through useful connections (not just finance) and will be supportive over the long term through good times and bad.

Sonya Iovieno

Silicon Valley Bank

Head of Venture and Growth Banking

Founders' attitude towards venture debt becomes increasingly more positive as they scale their company in terms of capital raised and company size.

What is your overall perception of debt?

Source:

Legend

  • Rather Positive
  • Neutral
  • Rather negative
  • Not sufficiently familiar with debt to comment
Note:
Founders respondents only. Numbers may not add up to 100 due to rounding.

Only 19% of founders surveyed have taken debt so far and over 44% mentioned either being unsure or only focusing on securing equity for growing their business.

Is debt part of your capital financing plans for business growth?

Source:
Note:
Founders respondents only.

Through venture debt, Daye got to enjoy the best of both worlds - venture capital to fuel growth, and venture debt to enable us to continuously invest in R&D projects that will pay off in the long-term.

Venture debt has proven an essential tool for Daye as we brought the manufacturing of our pain-relieving tampons in house. Venture capital is rarely an appropriate source of funding for hardware, design engineering and production expenses. Through venture debt, Daye got to enjoy the best of both worlds - venture capital to fuel growth, and venture debt to enable us to continuously invest in R&D projects that will pay off in the long-term. We wouldn't have been able to deliver on our promise for genuine product differentiation if we didn't have venture debt at our disposal.

Valentina Milanova

Daye

Founder

Debt Financing Solutions Cheat Sheet

As companies in Europe reach greater levels, founders and investors are gaining experience across a broad range of financing. Of those 160 founders who used debt in the past, 41% mentioned working capital, 35% venture debt and 24% growth lending.

What types of debt have you used in the past to fuel growth?

Source:
Note:
Based on the responses from 160 founders who used debt as part of their capital financing plans in the past.