Debt typically has been utilized by tech startups to pump up their stability sheets throughout late-stage financing, however now many are taking a look at it as a viable possibility a lot earlier.
“I believe over the previous years you’ll be able to see that as a common development,” mentioned Graham Brown, a associate at Lerer Hippeau agency in New York. “I believe basically, (entrepreneurs) are taking a look at extra choices.”
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Simply this month, edtech firm Udacity introduced it had raised $75 million in a debt facility from underwriter Hercules Capital, whereas on-demand electrical automobile firm Envoy raised $70 million in debt by the Macquarie Group. In September, one other edtech firm, Skillsoft, raised a $75 million credit score facility from CIT Group.
That doesn’t even point out bigger offers earlier this 12 months akin to company journey and expense administration platform TripActions elevating $125 million in a convertible-to-IPO financing, lodging market Airbnb elevating $2 billion in debt and fairness from Silver Lake, or Asana elevating $200 million in debt in June earlier than going public.
Whereas precise numbers on offers and quantity debt raised are troublesome to find out, Blair Silverberg, CEO at Capital — a agency that helps firms safe enterprise debt — mentioned there may be rising curiosity in debt as founders and entrepreneurs search for methods to lift capital with out diluting possession.
Capital has seen a 250 % enhance in buyer financings since March and believes that half of these might be instantly attributed to COVID-19.
“COVID affected all firms,” Silverberg mentioned. “No matter the way you have been affected, firms wish to take a look at all choices.”
Silverberg mentioned simply within the final two weeks he has seen VC-backed SaaS firms fascinated by elevating debt to make acquisitions, and a VC-backed client firm taking a look at debt to hold stock.
The rise of debt
Whereas enterprise capital is the type of financing most related to tech startups, Silverberg mentioned market dynamics began altering after the Nice Recession — round 2012 — when conventional asset managers like KKR and Blackstone began to lend at enticing multiples. Proper round that point, the startup fintech business — with the likes of AngelList and CircleUp — additionally began providing tech firms various financing strategies.
However, it has been a sluggish climb for debt as in comparison with the extra conventional enterprise capital route, which is almost 20 instances larger now than in the course of the preliminary know-how growth within the mid-Nineteen Nineties. Whereas solely about 2 % of early stage firms’ capital base is debt, almost 30 % of the capital base of firms on the S&P 500 come from debt, mentioned Silverberg.
Danger versus reward
Enterprise debt can have drawbacks, warns Lanham Napier, co-founder of enterprise capital agency BuildGroup in Austin. Whereas the price of the capital itself is considerably much less with enterprise debt, there may be danger related to leveraging an organization, particularly within the case of a startup the place repeatable enterprise might be an unknown.
“The upside is superb, however there is usually a vital draw back to leveraging your organization,” Napier mentioned.
Whether or not it’s a maturing tech market or COVID-19, it does appear extra startups are starting to eye debt as yet one more solution to unlock the wealth of capital at present out there.
“I don’t assume you could have seen a lot of a change in firms accessing debt within the final six tp eight months,” mentioned Brown, including firms did draw down on credit score amenities they already had entry to when the pandemic began in March and April. “I do assume that entry to capital has by no means been higher.”
Illustration: Li-Anne Dias