In the search for financing, venture debt has begun to gain popularity among startups. This alternative formula to venture capital has become the backing of high-growth companies with the objective of boosting their operations. Jaime López, Chief Financial Officer (CFO) of Heura Foods, and Christhi Theiss, venture debt expert at BBVA Spark, provide an in-depth understanding of the key features and advantages of this financing model.
“The situation in which Heura Foods found itself in meant that it was the right fit for equity financing and value generation.” Jaime López, Chief Financial Officer (CFO) of the foodtech, describes why the company decided to opt for venture debt to continue developing its project: to produce plant-based foods and reduce dependence on animal-based meat.
Venture debt has become an alternative for high-growth companies in a context where access to financing has been reduced due to inflation and rising interest rates. In 2022, in Spain, investments in startups fell to €3.5 billion compared to €4.3 billion in the previous year, as reflected in the ‘Socio-economic Contribution of South Summit in Spain’ report.
Globally, in 2022, venture capital funds’ investment in startups reached $415.1 billion. This is down 35% from the record set in 2021, according to the State of Venture report prepared by CB Insights.
Venture debt has thus found a promising context to expand and reach more startups. “As venture capital has become less attractive, entrepreneurs have had to complete their investment rounds through venture debt,” explains Christhi Theiss, venture debt specialist at BBVA Spark, “This model has taken on an increasingly important role, especially in those companies that have a clear path: that of profitability,” the expert continues.
Companies such as Heura Foods, which benefit from offers tailored to high-growth companies such as BBVA Spark, are an example of the goal outlined by Theiss. The foodtech recently announced that it aims for double-digit growth and profitability by 2023.
Why venture debt is a winner among entrepreneurs
The rise of venture debt as one of the financing alternatives for startups is not only due to the economic situation, but also to the benefits it offers to entrepreneurs. Its main advantage is that the equity participation of the entrepreneurs and their shareholders is not diluted: it is a loan made up mainly of debt that is repaid with interest, to which a small portion aimed at acquiring shares in the company is added. BBVA Spark offers this financing solution to provide a way for entrepreneurs to obtain financing without reducing, to a large extent, their ownership in the company.
According to López, of Heura Foods, the fact that venture debt avoids dilution is the main advantage of this formula. Another major benefit lies in the “trust effect” it triggers. “When banks like BBVA back you long-term through these instruments, other players in the ecosystem tend to improve their willingness to promote your project,” he adds. However, before opting for this formula, he recommends that other entrepreneurs “establish a clear plan for generating value.”
Christhi Theiss, from BBVA Spark, adds some more advantages of this formula. “Venture debt helps maintain greater control over the company’s capital structure and provides a greater financial boost to companies in advanced stages of financing (Series A and onward),” he says.
Another benefit of this alternative is the repayment periods of this loan: they usually include longer terms than other alternatives, between 2 and 4 years. “This is beneficial for companies that want to avoid excessive financial burden in the short term. It also increases their runway, helping them to overcome times when access to venture capital is more difficult,” says BBVA Spark’s Theiss.
Is venture debt a tailor-made option for all startups?
In addition to the example of Heura Foods, other startups have turned to this financing formula to boost their development. Venture debt does not distinguish between sectors. In Europe, Volta Trucks, a manufacturer of electric trucks, joined forces with the European Investment Bank (EIB) to obtain a €40 million venture debt loan.
There are also examples on the other side of the Atlantic Ocean. Relevant names in the ecosystem such as the Mexican unicorn Kavak, specialised in buying and selling second-hand vehicles, or the Colombian delivery unicorn Rappi boosted their progress thanks to venture debt financing, according to the Venture Capital and Growth Equity Ecosystem in Latin America 2022 report by Endeavor and Glisco Partners.
At what point is it best to opt for this route?
According to Christhi Theiss, of BBVA Spark, when the company has already passed its first stages of growth “when it already has a developed product market fit and needs additional capital to expand,” he explains.
However, both the expert and the CFO of Heura Foods advise against resorting to this model when the startup is in its early stages. According to Jaime López: “In very early stages of growth, it is difficult to get the most out of venture debt, since cash generation is still a long way off or the cost cannot be assumed.”
In any case, BBVA Spark guides each startup to assess whether venture debt is a suitable formula in its case. “We analyse each company from several points, such as global traction, its business model or the experience of the entrepreneurs. The company may show a negative EBITDA (gross operating profit), but have proven an income growth path and raised a round of funding from a venture capital fund,” says Christhi Theiss of BBVA Spark.
Drawing the future of venture debt
The approach of startups to this growth formula is a growing trend. In the EU and the UK, high-growth companies raised €30.5 billion in 2022 in venture debt, when a year earlier the figure stood at €15.9 billion, according to data from the investment advisory firm GP Bullhound. On the other hand, in Latin America, venture debt deals worth US$700 million were closed, 13% of total private equity investment, according to data published by LAVCA.
“Regardless of the market environment, venture debt is here to stay,” says Christhi Theiss, who, from his experience, claims that “successful entrepreneurs are now actively seeking venture debt.”
The expert expects to see other institutional investors, such as pension and investment funds, increase their participation in this model, which “can provide attractive returns and lower volatility compared to other forms of investment.”
Venture debt is gradually consolidating itself as an additional formula that helps solve the equation for any high-growth company to finance itself and continue its growth path.
