It’s Not All About Venture Capital: Tech Startups Eye Debt Raises

Debt often has been used by tech startups to pump up their balance sheets during late-stage financing, but now many are looking at it as a viable option much earlier.

“I think over the past years you can see that as a general trend,” said Graham Brown, a partner at Lerer Hippeau in New York. “I think in general, (entrepreneurs) are looking at more options.”

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Just this month, edtech company Udacity announced it had raised $75 million in a debt facility from underwriter Hercules Capital, while on-demand electric car company Envoy raised $70 million in debt through the Macquarie Group. In September, another edtech company, Skillsoft, raised a $75 million credit facility from CIT Group.

Earlier this year there were even larger deals, such as corporate travel and expense management platform TripActions raising $125 million in a convertible-to-IPO financing, lodging marketplace Airbnb raising $2 billion in debt and equity from Silver Lake, andr Asana raising $200 million in debt in June before going public.

While exact numbers on deals and amount debt raised are difficult to determine, Blair Silverberg, CEO at Capital Technologies—a firm that helps companies secure venture debt—said there is rising interest in debt as founders and entrepreneurs look for ways to raise capital without diluting ownership.

Capital has seen a 250 percent increase in customer financings since March and believes that half of those can be directly attributed to COVID-19.   

“COVID affected all companies,” Silverberg said. “Regardless of how you were affected, companies want to look at all options.”

Silverberg said in just the last two weeks he has seen VC-backed SaaS companies interested in raising debt to make acquisitions, and a VC-backed consumer company looking at debt to carry inventory. 

The rise of debt

While venture capital is the form of financing most associated with tech startups, Silverberg said market dynamics started changing after the Great Recession—around 2012—when traditional asset managers like KKR and Blackstone started to lend at attractive multiples. Right around that time, the startup fintech industry—with the likes of AngelList and CircleUp—also started offering tech companies alternative financing methods.

Nevertheless, it has been a slow climb for debt as compared to the more traditional venture capital route, which is nearly 20 times bigger now than during the initial technology boom in the mid-1990s. While only about 2 percent of early-stage companies’ capital base is debt, nearly 30 percent of the capital base of companies on the S&P 500 come from debt, said Silverberg. 

Risk versus reward

Venture debt can have drawbacks, warns Lanham Napier, co-founder of venture capital firm BuildGroup in Austin. While the cost of the capital itself is significantly less with venture debt, there is risk associated with leveraging a company, especially in the case of a startup where repeatable business can be an unknown.

“The upside is amazing, but there can be a significant downside to leveraging your company,” Napier said.

Whether it’s a maturing tech market or COVID-19, it does seem more startups are beginning to eye debt as yet another way to unlock the wealth of capital currently in the market.

“I don’t think you have seen much of a change in companies accessing debt in the last six to eight months,” said Brown, adding that companies did draw down on credit facilities they already had access to when the pandemic started in March and April. “I do think that access to capital has never been better.”

Illustration: Li-Anne Dias