The investment euphoria has faded in the world of startups. The end of the pandemic, which boosted digital businesses, the war in Ukraine and the rise in interest rates have slowed down the activity of venture capital funds, which are much more cautious when it comes to investing. Just as an example, if venture capital investment in the first quarter of 2022 is compared with that of the same period in 2023, the drop is -67%, according to data from the GP Bullhound fund regarding emerging companies in Europe and Israel.
This climate of caution has forced start-ups to look elsewhere for funding. Specifically, in risk loans -or venture debt-, which are granted by investment funds with higher interest rates than traditional bank credits, reluctant to finance unconsolidated businesses.
The Titans of Tech 2023 report, prepared by the GP Bullhound fund, makes it very clear that this trend is on the rise. From 2021 to 2022, the indebtedness of European startups has more than doubled, going from 11.1 to 23.3 million euros. “2022 was the year of debt. This change is driven by several factors: the less favorable context for raising venture capital, as well as the opportunities for mergers between companies”, says the recently published report.
Without going too far, several Spanish startups have closed operations with significant amounts of risk loans in the last year. Among them, the 20 million debt obtained by the Barcelona platform Exoticca, specialized in long-haul trips, as well as other operations carried out by Factorial, Ironhack, Clarity or Trucksters, recalls Marc Clemente, investor of the Madrid fund Kfund, specialized in ventures. debt .
Is there reason to worry about the growing indebtedness of startups? 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, the venture debt is a good tool in the face of difficulties in raising venture capital. However, if the business is unsound, it could even ruin these businesses, although that hasn’t happened yet.” The interest that the funds demand is usually around 10% per year and the return of the loans must be carried out within a period of nine to twelve months. The ideal, Clemente maintains, is to combine the entry of loans with that of venture capital: for every euro of debt, five of capital enter. With this formula, the funds that lend the money also ensure a return in case the startup does not meet its objectives. In fact, if the startup is ultimately unable 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 the venture debt, the composition of the shareholding is not altered. Entrepreneurs get financing, grow the business and its valuation. Now it may be a good option, since funds are pricing digital businesses down. So the venture debt is a tool to gain time and wait for the situation to return to normal”, points out the investor. In his opinion, this will happen at the beginning of 2024, since the investment climate in 2023 continues to be rare due to the rise in rates and inflation.
