Dear readers, passionate about entrepreneurship and finance, today I offer you a journey to the heart of an unknown but promising alternative for the financing of European startups: Venture Debt. I invite you to discover why Venture Debt deserves to be considered a valuable source for funding startups.
What is Venture Debt?
Before diving into the intricacies of Venture Debt, it is important to define what this form of financing is. Venture Debt is a medium-term loan granted to fast-growing startups, often backed by venture capital (VC) investors. Unlike VC financing, which requires the transfer of part of the company’s capital in exchange for an investment, Venture Debt makes it possible to obtain funds without significantly diluting the capital of the founders and shareholders.
Venture Debt players
The Venture Debt market is dominated by three types of players:
- Specialized players: These are the pioneers who democratized the activity of Venture Debt, particularly in the United States, with firms such as Triple Point Capital, Square One Bank and Hercules Capital. In Europe, players like Kreos Capital, Columbia Lake Partners and Finstock Capital have also started to make a name for themselves. In France, there are players such as Rainmakers, Wormser & Frères, Walliance Première and IVO Capital Partners.
- Institutional players: These are mainly investment banks that finance start-ups. One of the best known in Europe is Barclays.
- Government actors: Europe stands out for its active role in economic development, with well-known actors such as the European Investment Bank (EIB) and Bpifrance, which offers schemes such as Seed Loans (PA) , Investment Seed Loan (PAI) and Research & Development Investment Loans (PI R&D).
Venture Debt: a booming market… except in Europe?
While Venture Debt is experiencing dazzling growth in the United States, where it represents 15% to 20% of funds invested, this alternative is struggling to establish itself in Europe. In the United Kingdom, the share of Venture Debt barely reaches 10%, and it drops to 5% for continental Europe.
Several reasons explain this European reluctance to adopt Venture Debt:
- Greater risk aversion and a cost of debt often considered too high.
- The pejorative view of debt, perceived as a signal of poor financial health for a startup.
- A certain lag in terms of financial innovation in Europe compared to the United States.
- A lack of harmonization of rules for this activity within the EU.
The Potential of Venture Debt in Europe
Despite these obstacles, Venture Debt could be an ideal solution for Europe. Indeed, the majority of European startups are at the ends of a spectrum that goes from the local SME to the global SaaS startup, which makes them ideal candidates for Venture Debt.
Why should startups consider Venture Debt?
Venture Debt has several advantages for startups:
- Less dilution: Venture Debt allows founders to keep more of their business by avoiding selling a significant portion of their capital to venture capitalists.
- Flexibility: Venture Debt repayment terms are often more flexible than a traditional bank loan, allowing startups to better tailor their repayments to their cash flow and growth.
- Leverage: Venture Debt can be used in addition to raising venture capital funds to increase the total amount of financing obtained and accelerate the growth of the company.
- Access to resources and networks: Venture debt players often have extensive expertise and networks in the entrepreneurial ecosystem and can provide startups with valuable support in terms of advice, contacts and development opportunities.
In conclusion, Venture Debt is an unknown but promising financing alternative for European startups. It is high time that Europe realizes the potential of Venture Debt and strives to catch up with the United States. The benefits are undeniable: less dilution for founders, more flexible funding and a healthier partnership between startups and investors.
So, dear entrepreneurs and investors, don’t wait any longer to explore this avenue and broaden your horizons in terms of financing. Venture Debt could well be the hidden treasure that will allow our European startups to shine on the international scene.
This article has been translated from French to English with Google Translate.