SA国际传媒

Venture capital-backed startups in the U.S. are raising slightly more debt than they did in 2021鈥攁nother possible sign that equity fundraising this year is much different than last year.

Although debt numbers are not up dramatically from last year, there has been an uptick in dollar amounts even though the number of deals is relatively even.

According to SA国际传媒 鈥攚hich tracks publicly announced debt financing rounds鈥擵C-backed startups in the U.S. have raised nearly $15.9 billion in debt in 321 deals through the first seven months of the year. Through the same period in 2021, startups had publicly announced about $13.3 billion of debt in 320 deals.

Those who deal in debt say the increase is very real.

鈥淚 think March was the beginning of what we are seeing now,鈥� said , senior market manager at . 鈥淎t that time, people were just asking about the uncertainty (of the VC market), now it is just full-on choppy.鈥�

In just July, startups in the U.S. raised more than $1.4 billion in publicly announced debt鈥攆ar outpacing the $824 million in July last year.

While it is important to note those numbers are not all-encompassing鈥攎any companies do not announce debt raises鈥攁nd it is not unusual for some startups in areas like fintech to raise debt for working capital, the increase in debt does come as many venture firms are reining back dollars.

Some of the largest announced debt raises this year include:

• Connecticut-based financial services firm announced a $2.6 billion debt raise.
• Virginia-based edge infrastructure provider closed a $1.7 billion debt deal.
• New York-based alternative financing startup announced a $725 million debt raise.

Debt for all

Many think venture debt, which refers to debt a VC-backed company raises usually in unison with raising equity, will be something many startups look to as they try to extend runway. Such debt is often less structured and with fewer financial covenants than other forms of debt.

Other startups鈥攅specially in fintech鈥攚ill raise warehouse financing to have more working capital on hand.

鈥淎dding working capital does not necessarily extend your runway, but it keeps you away from the treetops,鈥� Allred said.

In July, New York-based alternative financing firm announced a $400 million debt raise. The debt raised enables Capchase to commit capital to its customers.

鈥淲e think that with the amount of debt capital we raised we will comfortably serve our customers,鈥� said co-founder and CEO . 鈥淚n the face of an uncertain market environment, reducing funding uncertainty was a priority for Capchase this year.鈥�

Fernandez said debt in all of its forms is increasingly being used by early-stage companies as part of their capital stack.

鈥淲e expect the proliferation of different debt forms to only continue and become more prevalent with this current macro-economic environment given that valuations have come down, which means founders need to sell much more of their company for the same amount of equity,鈥� he said. 鈥淎s a consequence, there is more interest than ever in debt and alternative financing.鈥�

Looking for debt

New York-based , which provides non-dilutive alternatives such as debt to founders, has seen a significant increase this year in companies coming to its platform looking for venture debt.

In the first quarter of the year, fewer than a dozen companies were actively raising venture debt. Last quarter, that number rose to 165 companies. Thus far this quarter, 63 companies are actively raising such debt.

The platform also has seen a significant increase of companies looking at educational materials around non-dilutive funding and leveraging the max debt raise calculator.

鈥淭echnology companies have long underutilized debt relative to other sectors,鈥� said Hum CEO . 鈥淏ut it took the SaaS crash to create a tipping point in venture debt adoption.鈥�

Silverberg said he has seen an uptick in 鈥渇allen unicorns鈥� recently looking for financing that does not require them to take down rounds which can allow investors to trigger anti-dillution provisions.

鈥淐reative investors and CFOs are partnering together in this ecosystem to invent financing structures that extend runway without triggering anti-dilution,鈥� he said. 鈥淗igh finance has arrived in Silicon Valley and we expect it to stay well into 2023.鈥�

While that debt is not as cheap as it once was thanks to rising interest rates, those in the market do not think that will keep startups from looking at debt.

鈥淚 don鈥檛 think you will see it deter companies from raising鈥� debt, said Allred, adding that even with higher rates, debt can be cheaper than having to sell a large stake of your company at a low valuation.

Allred said with macroeconomic factors like supply chain issues, labor shortages and inflation affecting the markets, it is hard to predict the future of debt. However, he expects the overall tech downturn to lag into next year, which would keep debt a likely option for many.

鈥淚 think the tech downturn will persist a little longer鈥� than the market in general, he said. 鈥淚 think it will persist in the tech ecosystem into 2023.鈥�

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