The investment euphoria has faded in the world of emerging companies. The end of the pandemic, which boosted digital business, the war in Ukraine and the rise in interest rates have slowed the activity of venture capital funds, which are much more cautious when it comes to investing . Just as an example, if you compare venture capital investment in the first quarter of 2022 with that of the same period in 2023, the drop is -67%, according to data from the GP Bullhound fund relating to emerging companies in Europe and Israel
This climate marked by caution has forced emerging companies to look for funding elsewhere. Specifically, in risk loans – or venture debt -, which are granted by investment funds with higher interest rates than traditional banking credits, reluctant to finance poorly consolidated businesses.
The Titans of Tech 2023 report, produced by the GP Bullhound fund, makes it very clear that this trend is evolving upwards. From 2021 to 2022, the indebtedness of European emerging companies has more than doubled; has gone from 11.1 to 23.3 million euros. “2022 was the year of the debt. This change is driven by several factors: the less favorable context for raising risk capital, in addition to the opportunities for mergers between companies”, says the recently published report.
Without going too far, several Spanish start-up companies have closed operations with significant sums of risk loans in the last year. Among which stand out the 20 million debt obtained by the Barcelona platform Exoticca, which specializes in long-distance travel, and also other operations starring Factorial, Ironhack, Clarity or Trucksters, recalls Marc Clemente, investor of the Madrid fund Kfund, which specializes in venture debt
Are there reasons to be concerned about the growing debt of emerging companies? Clemente points out that everything depends on the company’s ability to generate business. “If you present a business plan that guarantees the generation of income and value, venture debt is a good tool to combat the difficulties in raising venture capital. However, if the business is not solid, it could even bring them to ruin, although this has not happened yet.” The interest that the funds demand is usually around 10% per year and the repayment of the loans must be carried out within nine to twelve months. The ideal, says Clemente, is to combine the entry of loans with that of venture capital: for every euro of debt entered, five of capital. With this formula, the funds that leave the money are also guaranteed to be returned in the event that the company does not meet its objectives. In fact, if finally the emerging company is not able to repay the loan, this type of operation always foresees that the lenders become shareholders of the company.
Miguel Kindelán, director of GP Bullhound in Spain, adds that venture debt is also considered a good tool for entrepreneurs who want to avoid losing control over property. “With the entry of venture debt, the composition of the shareholders is not altered. Entrepreneurs get funding, grow the business and its valuation. It may be a good option now as funds are undervaluing digital businesses. So venture debt is a tool to buy time and wait for the situation to normalize”, says the investor. In his opinion, this will happen in early 2024, as the investment climate in 2023 remains rare due to rising rates and inflation.
