The (Re)Emergence of Venture Debt: how to unlock growth in a challenging fundraising market

TL;DR

• Venture debt is a form of non-dilutive funding. It has reemerged as an alternative to traditional VC due to falling valuations and a challenging fundraising environment.
• Debt funding has a multitude of use cases: accelerating organic growth, acting as a bridge to profitability, mitigating the risk of an unsuccessful bridge round, providing insurance to reach the next round, as well as funding M&A transactions.
• Venture debt is not a source of survival financing, and should be raised from a strong financial position. Founders should preempt the need for additional funding and only raise venture debt with at least 12 months’ runway remaining.

As startup valuations continue to erode and the fundraising environment remains challenging, startups at all stages are searching for creative ways to extend their runways and continue their accelerated growth.

Complementing traditional VC, venture debt has emerged as a compelling financing alternative. It provides startups with significant financial benefits and strategic advantages without diluting equity and control.

At Mountside Ventures, our deep expertise in the European startup ecosystem has shown us that landing the right venture debt deal at the appropriate inflection point can catapult a startup toward achieving its growth potential.

When deployed strategically, venture debt unlocks an array of growth opportunities. It is a useful instrument to:

1. Accelerate Organic Growth Initiatives

Whether it’s bolstering sales & marketing, enhancing the product, entering new markets or expanding internationally, venture debt equips startups with the capital to double down on high-impact projects without overextending their equity reserves. Higher growth and revenue give startups stronger negotiating power in the next equity round. This often leads to higher valuations and more founder-friendly terms.

2. Act as a Bridge to Profitability

Companies nearing breakeven may find venture debt a more attractive option than further equity dilution, to get them over the profitability line. Management teams and current investors often prefer less dilutive financing alternatives at this critical juncture, as every percentage of ownership becomes more valuable.

3. Prevent the Risk of an Unsuccessful Bridge Round

Startups sometimes need to raise small “bridge” rounds when they fall short of cash before meeting the target KPIs required to raise the next full-scale equity round. However, these bridge rounds carry significant risks — lead or existing investors may opt out of the round, or the start-up may be forced to do a down-round. This sends negative signals to the broader investor community.

Venture debt allows startups to avoid this precarious bridge round scenario altogether. By tapping debt financing, founders can access the necessary capital to reach the next equity milestone without the potential for damaging their reputation or future fundraising prospects.

4. Insurance Policy to Reach the Next Round

When raised alongside or after an equity round, venture debt extends your runway, providing a safety net and greater flexibility to hit key KPIs ahead of the next equity round. The additional runway increases the startup’s probability of success and reduces the risk of failure.

5. Fuel Growth Through Acquisitions

Accessing venture debt allows startups to pursue strategic M&A to consolidate their market position. Instead of devoting equity to buyouts, debt capital can power inorganic growth moves, while minimising dilution and preserving ownership.

Conclusion

While these use cases highlight the growth-amplifying potential of venture debt, startups must be strategic in their capital strategy. Venture debt should not be used for short-term liquidity challenges or survival financing. Founders should preempt their need for more runway and raise venture debt with at least 12 months remaining runway. It should be proactively raised from a position of strength and deployed to drive growth initiatives.

How can we help?

As one of Europe’s leading fundraising advisors, Mountside Ventures has developed deep market expertise to guide startups and investors through this powerful funding instrument. Our venture debt advisory focuses on structuring and executing the most optimal venture debt facilities to ensure founders and VCs extract maximum strategic and financial value. Revenue-based financing also provides an attractive alternative to venture debt for early-stage start-ups.