The lack of financing that supports the risk posed by emerging technology companies, or startups, is the main factor that slows down the enormous development potential of Spain’s innovative ecosystem. Funds that offer the Venture Debt (VD) formula contribute to alleviating this problem through a mixed formula that combines characteristics of traditional bank loans with elements of equity investment (Venture Capital). In Spain they have been making their way relatively recently, while in the United States and the United Kingdom they are experiencing great expansion.
Claudia Gómez Estefan, CEO and co-founder of Senniors, a successful startup focused on senior care, affirms that Venture Debt helps them obtain more capital without excessive dilution with debt leverage. “This is important for us – she says – because we want to have the largest percentage of the shares in our hands.”
When we started – he adds – no bank gave us loans based on an idea and without initial solvency. The Venture Debt formula required a lower percentage of shares than Venture Capital. The cost of financing for three-four years was 10%. It may seem high but we must keep in mind that no one gave us credit for being an emerging company.”
Lucas de la Vega, Investment Director at Actyus, alternative investment manager of the Andbank Group, also participated in the Money Dialogues to talk about financing alternatives for the innovative technological ecosystem; Ignacio Puig, General Partner at Inveready; Oriol Junco sa, Managing Partner and CoFounder at ESC Venture Capital (previously called Encomenda Smart Capital) and Ignacio Moro, Managing Partner and Co-founder of Extension Fund.
Venture Debt – explains Lucas de la Vega – offers the best of bank loans and the best of Venture Capital – shares in exchange for capital – for emerging companies. This intermediate formula is very useful so that entrepreneurs can finance themselves when they start. Furthermore, the shareholding taken with Venture Debt does not acquire political rights, which respects the autonomy of the entrepreneurs.
“The risk-return in initial stages is not adjusted for traditional financing,” says Ignacio Puig. In his opinion, the risk-return relationship is tighter in Venture Debt than in the other financial alternatives that exist for startups.
“The banks – points out Ignacio Moro – have not fully entered into risk financing in the initial stages of these companies. Until now they had focused on large, small and medium-sized companies. This has led to the proliferation of funds specialized in Venture Capital and, more recently, Venture Debt funds as a more specific alternative for emerging companies.”
“In Venture Debt – he adds – loans to startups are structured taking into account the particularities of each business so that entrepreneurs can fulfill and accelerate their plans. That is why this alternative to traditional bank financing is successfully extended.”
Oriol Juncosa also states that for entrepreneurs, when their companies already have sustainable income, a combination of capital/equity and debt is a good alternative, since with this they can finance themselves while minimizing dilution. Between his fund and his activity as a business angel, he has invested in capital / equity in more than seventy companies in the seed phase. More than 15% of them, after carrying out capital increases, also obtained Venture Debt.
Savings alternative
Venture Debt, in parallel, has become a savings instrument through the investment funds that have specialized in them and that have emerged in recent years. “Venture Debt funds – says Lucas de la Vega – are a savings alternative for investors that balances risk and profitability. The solution we offer investors is not complicated.”
Ignacio Moro affirms that the combination of loan plus entry into the capital of emerging companies, characteristic of Venture Debt, provides greater liquidity in the return to investors. “In addition to offering faster returns than other types of investment in startups, the very nature of debt offers a very interesting risk-return binomial for the investor,” he adds.
Venture Debt investment funds are regulated by the National Securities Market Commission. Institutional investors, family offices and all those investors with liquidity who allocate a part of their savings to risky alternatives usually invest in them.
Startups, as Lucas de la Vega states, have three characteristics: high risk, high profitability and high mortality. The key to the success of Venture Debt investment funds, as in the rest of collective investment funds, is in the selection and diversification of the startups they bet on. The usual average is about thirty to forty startups per fund.
We invest in many companies and diversify a lot – explains Lucas de la Vega – with a statistical approach to our investment. The collection of the debt in an average period of time, generally three years. It is a risk limitation. The balance is positive.” Ignacio Puig confirms it: “We are venture capital funds but history has always been consistent in return. In our Venture Debt funds since 2012 it has always been in double digits.”
Veture Debt funds offer a more conservative approach than Venture Capital funds – adds Lucas de La Vega. They have a lower return profile but with greater liquidity. In any case, it is advisable to only allocate a limited percentage of the entire investment to them.”
Ignació Moro points out that savings investment in Venture Debt funds has grown a lot globally in the last three years. In Europe, this investment has multiplied by three and Spain follows the trend. In this regard, he explains that there is a growing interest from international funds in coming to Spain given the good evolution of the ecosystem.
Lucas de la Vega attributes the success of Venture Debt to its greater flexibility, which means it has a very broad market. “Now – he points out – the important thing is that the ecosystem grows more so that this investment alternative continues to grow at a good pace.”
Good rhythm”. In the opinion of Oriol Juncosa there will progressively be greater opportunities for alternative investors because Venture Debt will increasingly enter more mature companies.
“We must keep in mind – he points out – that the first institutional Venture Capital funds were created in Spain in the early 2000s. Venture Debt funds are even younger, since the first was created a little more than a year ago. decade”.
Spain attracts talent
Oriol Juncosa also highlights that in Spain there is a spectacular evolution of startups that are mature and have the capacity to generate profits. “The technology sector in Spain – he points out – has had great development in recent years but we are only at the beginning. “A lot of talent is coming.”
“In Spain,” he adds, “all local Venture Capital and Venture Debt funds cannot invest more than one billion annually, when in Great Britain, for example, there are several funds worth more than one billion. In our country we still have a long way to go.”
Claudia Gómez Estefan adds that the great advantage of Venture Debt is that it can be adapted to each company at each stage and that offers many guarantees. “The ecosystem – she says – is in a good moment. We are reaching sustainability. “Spanish emerging companies, in this sense, are very attractive for international funds”
Ignacio Puig also believes that there is room for Venture Debt funds to continue growing as long as they adapt. They not only depend on the evolution of the technological ecosystem but also on the success and disinvestments of small and medium-sized companies.
All participants agree that Spain offers a great quality of life and good working conditions to attract enough talent to make the technological ecosystem grow more, although they point out that taxation penalizes more than in other destinations. Claudia Gómez Estefan believes, however, that Spain should value talent more, since it pays better abroad. She also says that the English language should be improved much more, as should Portugal. “Technology – she says – allows us to work from Spain for the rest of the world and that must be fully taken advantage of.
