April 28, 2022

Startups now have another alternative to VC: growth through debt

The latest alternative lending fund for startups is Avellinia Capital, which is raising $150m.

Eleanor Warnock

4 min read

Cinchona's Tarig El-Sheikh has raised debt and equity to build his startup.

For European founders who want cash, VC is no longer the only game in town. As the region’s startup ecosystem has matured, founders are raising capital in more diverse ways, including a form of credit that’s as old as ancient Greece: asset-backed lending. 

It sounds horribly financial but it’s pretty simple. If you’re a farmer with 100 cows, you can raise funding on the back of those “assets” by promising the lender to give them your cows if you don’t repay the loan. 

In the startup equation, physical assets like used smartphones and tablets — in the case of German startup Grover — or scooters — in the case of Tier — are being put up as collateral. Other assets include “accounts receivable”, or unpaid invoices. 


New European and established US debt firms are increasingly offering this kind of capital to startups — and the latest firm to enter the game is London-based Avellinia Capital, or AvCap. It’s raised $50m of a $150m fund to provide this kind of debt financing to startups, focusing on debt written against financial assets. 

It’s backed eight companies with the fund so far, including fintech Ritmo and ecommerce aggregator Cinchona. 

Why pick asset-backed lending?

“Most founders in our space are very attuned to the fact that there are certain elements of their business to scale where they should really be using debt rather than equity,” says AvCap managing partner Julian Schickel. 

One big perk of debt versus equity funding: there’s no need to give up ownership in the company. On top of that, interest rates are lower on this debt than compared to the kinds of returns equity investors might be expecting, given the risk that the equity isn’t repaid, Schickel adds.

Matthias Dux, another AvCap managing partner, says that interest on early-stage asset-backed lending can be typically in the 8-15% range, “depending on a number of factors” including underlying products, riskiness, company stage and track record. That compares to less than 6% for bank financing. 

AvCap isn’t the only fund out there to provide this kind of alternative credit financing for early-stage startups. As usual, the US already has several funds in the area. These include i80 — which backed Ritmo with AvCap — Atalaya, Coventure, Tacora and Upper 90. 

It’s also worth noting that asset-backed lending is different from another funding alternative popular with founders now: revenue-based financing. In the case of RBF, lenders don’t lend against assets, they receive a percentage of revenues in return for providing capital. And in some cases, asset-backed lenders are actually lending to the revenue-based financing companies. 

How are startups in Europe using debt financing? 

In some cases, it doesn’t make sense to finance startup activities by giving up ownership, and non-dilutive capital like debt is more suitable. 

An Amazon aggregator, for example, might not want to give up a slice of the company to finance acquisitions. Or a company that provides loans to companies might not want to back those loans by giving away a chunk of its business. 

That was the case with Spain-based Ritmo, which helps ecommerce companies deal with cash flow problems by offering them working capital finance and a buy now, pay later (BNPL) payment system. The startup closed a $200m debt funding round led by i80 Group and AvCap earlier this month. 


Debt and equity go hand-in-hand

Most startups that raise asset-backed loans go on to raise other forms of debt — including from more traditional lenders like banks — or raise from VCs. 

One of those is AvCap portfolio company, ecommerce aggregator Cinchona, which has raised £13.2m in debt and equity and has a €25m credit facility. It plans to use the credit facility to acquire brands and even other aggregators. Unlike some peers, like Berlin Brands Group and SellerX, which have raised hundreds of millions in equity, CEO Tarig El-Sheikh says he wants to keep fundraising lean. 

“We strongly felt that it didn't make sense to raise that much capital. It just means inefficiency, because you're forced to spend it or worse, forced to buy bad assets. There’s a natural limit to how much you can deploy or how many people you can hire effectively.”

He recommends founders raise equity for investing in things that will grow the business, like hiring people, “because equity is so expensive”. It’s better to look to debt, he says, when there are assets generating profits already. That’s true in the case of ecommerce aggregators like his, which are buying preexisting companies and brands already making money. 

“If you can combine [debt and equity], then really that's the secret sauce.” 

Eleanor Warnock

Eleanor Warnock was Sifted’s deputy editor and cohost of Startup Europe — The Sifted Podcast. Find her on X and LinkedIn