Venture debt had a record year in 2024, according to Atomico's latest State of European Tech report, with startups raising $4.7bn in the first three quarters of the year. And it’s not going away any time soon.
Venture debt is a type of loan used by early-stage, growing companies that may not yet be profitable and don’t yet qualify for traditional bank finance. It’s typically provided to venture-backed companies as a way to support their growth without diluting equity.
“Venture debt is essentially an antidilution tool,” David Bateman, managing partner of Claret Capital Partners, explains to Sifted. “And at a time when valuations are considered to be under pressure, it's more attractive to entrepreneurs and earlier stage investors to make use of venture debt than to make use of equity.”
Bateman notes that venture debt also had comparably impressive years in 2023, 2022 and 2021, and this year’s data shows debt is on a long-term growth trend. It's part of a wider surge in the popularity of debt financing across the ecosystem. Despite falling off in the second half of the year after a bumper H1, Sifted's H2 report shows venture debt accounted for 36% of European funding this year.
Let’s take a look at what venture debt has offered startups in 2024 and what the forecast is for the coming year.
Optimising venture debt
Peter Aschmoneit, cofounder and CEO of consumer intelligence platform Quantilope, says his startup has utilised venture debt alongside equity this year to finance its growth, investing in demand generation like trade shows, search engine advertising, search engine optimisation and webinars.
Venture debt was simply the tool for some to replace equity rounds.
“Everyone knows that the last two years were extremely challenging in terms of equity fundraising,” says Aschmoneit. “On one side, there was a high valuation expectation of founders, and on the other side, it was hitting a very pessimistic market. Venture debt was simply the tool for some to replace equity rounds.”
This is a view shared by Slava Kremerman, cofounder and CEO of Zen Educate, a platform matching teachers with schools, who says venture debt has been a “brilliant alternative” to equity for certain use cases in its operation.
He says Zen Educate has primarily used venture debt as additional firepower for mergers and acquisitions (M&A) — with a proportion of its two acquisitions being financed through venture debt facilities.
“We've had a lot of success with the acquisitions that we've done,” Kremerman tells Sifted. “The plan [is] to continue to put the foot on the gas with additional acquisitions, and debt is a much better instrument than equity for funding good chunks of those acquisitions.
I believe this record year for venture debt is due to a combination of reduced capital availability and lower valuation multiples for many startups.
“You'll always need a little bit of equity and a little bit of debt — you can't be 100% of one or the other — but as a mechanism for things that are fairly predictable like M&A, debt financing becomes a less dilutive way for founders to be able to do things like acquisitions,” he adds.
A year ago, Hivebrite, a white-label online community platform, combined equity financing and venture debt to sustain growth, fund an acquisition and minimise dilution.
Jean Hamon, founder and CEO of Hivebrite, says venture debt proved highly flexible and the startup secured two tranches — one of which was used immediately and the other, which it may not need to draw on, providing leverage and optionality during periods of market uncertainty.
“I believe this record year for venture debt is due to a combination of reduced capital availability and lower valuation multiples for many startups,” says Hamon. “Venture debt remains a competitive financing option, particularly for startups aiming to preserve equity.”
More of the same for 2025?
Going into the new year, Bateman predicts the secular growth trend for venture debt is going to continue — and founders must adjust their business plans to leverage venture debt to support their growth for the 12 months ahead.
“Founders should run their business for maximising their value and their long-term strategy,” he says. “They shouldn't rewrite their strategy to suit debt — but if their strategy suits a moderate burn and [looks] to be predictable over the next 12-24 months, they should definitely consider venture debt as a tool to reduce their dilution.”
Venture debt always had its place and will [continue to] have its place because it was and is a really good additional tool alongside equity, and it will still be that in the future.
Aschmoneit believes that the last two years have separated good businesses and bad businesses, and you'll find many more startups being profitable or almost profitable today. That, he says, now makes it easier for venture debt providers to finance those companies as they have a much higher credibility and trust in startups that are showing that they can generate profits.
“I believe that in 2025, things will get better with the outlook and economy,” says Aschmoneit. “Venture debt always had its place and will [continue to] have its place because it was and is a really good additional tool alongside equity, and it will still be that in the future.”
With the lack of late-stage funding still an issue, Kremerman thinks there's a lot of great companies out there which may be open to other alternatives — like M&A –—in which case late-stage venture debt becomes a very viable solution.
“If you look at late-stage funding, it's largely fallen off a cliff in terms of equity funding,” he says. “You have a lot of great businesses who should be getting additional capital to grow who aren't necessarily getting that in the current state of equity markets.
“Venture debt has done a great job of stepping in and supporting some of those phenomenal businesses that might not otherwise have raised equity in 2024. I foresee that continuing into early 2025.”
