Month: May 2023

Venture debt accounted for 30 per cent of all venture capital raised in European tech start-ups in 2022, according to Dealroom – about double the percentage from the previous six years.

But what exactly is venture debt? How do you get it and with the collapse and subsequent buyout of pioneer venture debt provider, Silicon Valley Bank (SVB), is it a good option for growing businesses right now?

What is venture debt?

Venture debt is the loaning of capital to early stage, high-growth businesses which are backed by venture capital. It provides a start-up with liquidity between equity funding rounds and comes on top of venture capital, not instead of it.

Venture debt can be offered to start-ups and scale-ups that don’t have significant assets and doesn’t require them to give up a stake – minimising the risk of equity dilution.

The European Investment Bank likens the finance option to a student loan for a young business – where there are no assets to the company’s name but expect future earnings and returns.

“Venture debt is essentially the first piece of debt a young, typically tech, company which has already had some – perhaps Series A or Series B – equity is going to take on,” Brett Israel of law firm Marriott Harrison tells Growth Business.

“It offers one core benefit for a company like that: by the time you’ve had two or three rounds of equity funding, you’ll potentially have quite a complicated cap structure, which means trying to do anything with shareholders becomes more complicated because you need lots of consent – it becomes a slow and perhaps cumbersome process.

“Venture debt rides over that because there’s no need to amend the shareholder position. It means there is no dilution.”

Why and when do you need venture debt? 

Venture debt serves two main purposes: to extend the runway of the equity round and act as a start-up’s insurance policy in the event costs are higher than expected.

“You can use venture debt for a whole range of purposes,” Israel says. “Typically, it is used for something more one-off, like a strategic move to a new market or an acquisition trail.”

Founders can approach debt providers directly in between fundraising rounds, but sometimes venture capital firms will approach providers to help support a start-up.

The capital can then be used to finance R&D or purchasing equipment – the main benefactors tend to be companies in life sciences, SaaS and deep tech.

Venture debt vs venture capital

Venture capital provides capital in exchange for a slice of the business and usually a place on the board. VC investors are typically veterans in the industry who can link start-ups to contacts and provide advice.

Venture debt is an addition to venture capital and has the sole purpose of providing an early-stage business with liquidity in between funding rounds. Providers don’t require a member on the board, but in some cases can offer advice.

See also: Most active venture capital firms revealed 

Venture debt vs traditional loans 

Venture debt loans serve a different purpose to traditional bank loans. Debt serves high-growth, mostly pre-revenue start-ups backed by venture capital. So, while traditional banks require positive cashflow as proof you can pay back the loan, venture debt providers take into consideration venture capital raised and future revenue.

As this is more risky than traditional loans for the lender, debt providers tend to follow venture capital investors they trust to give them the confidence in providing the loan. The interest rate is also higher – usually ranging between eight and 12 per cent – and pay-back terms tend to be shorter, usually between one and two years.

They may also take an equity warrant – a bit like a stock option. They will want an equity kicker, which is to say if your business is doing well, they’ll have a chunk of the shares at the end of the loan period.

“Lenders are trusting what the management tells them about the trajectory of a business,” Israel says. “It’s about the business plans, projections and prospects of the young business.

“That’s risky. This is the first time these businesses take on debt. You’re pushing the lender to act as a quasi-investor because they’re taking an earlier stage risk than most banks would ever touch.”

What are the requirements?

Requirements from providers vary, but generally, they require companies to have completed one or two funding rounds from private investors before backing them. Other providers will require a business to have enough runway – usually around six months’ worth.

Lenders will also typically do the same background checks as a VC firm when looking to back a business, such as market fit, challenges and scalability.

“There are guidelines which are quite industry standard,” Israel confirms. “For example, has the business already had a few million by way of equity already invested in it over several rounds? Is the business on an improved revenue basis? You want the revenue to be increasing over the period of the loan which typically is around two to four years.”

How much can you borrow? 

The size of debt you can take on varies by provider, but some say an early-stage business can hope to achieve a loan of 20 per cent and 35 per cent of their most recent equity round. This tends to be anywhere between £1m and £10m.

Venture debt is very rarely a long-term solution. Most repayments are made anywhere from 18 months to three years and most providers expect to be repaid from the proceeds from the next funding round.

Should I be worried about the SVB buyout?

The buyout of the pioneer of venture debt, Silicon Valley Bank (SVB) caused concern in the industry, but should it affect your thoughts about using venture debt?

“If your exposure to SVB was because you had money deposited with them, that’s different than if you’re a venture debt borrower,” Israel assures. “If the latter, the problem is not so much yours, but the bank.

“Does everything that happened with SVB change venture debt in this country? The answer is no. It certainly caused a massive rupture in the market for a few days, but in fact it didn’t change anything.

“If anything, the venture debt market will be stronger because you’ll have more players coming to the fore than SVB. In fact, it’s probably indirectly a stimulus to some of the other lenders.”

Advantages and disadvantages of venture debt

Advantages 

• Can provide a start-up with significant runway
• Reduces the need to fundraise more or sell equity
• Doesn’t require a new member on the board
• Can unlock further equity down the line

Disadvantages 

• Can be difficult to pay back the high interest loan if the company fails
• Difficult to obtain for most start-ups – you’ll need VC backing in the first place

Venture debt providers UK

Silicon Valley Bank 

Request terms.

Kreos Capital

Request terms.

Flow Capital

Offering:

• Choice of 2-4-year term loan or 2-5-year bullet loan
• For businesses looking for $1-5m in first tranche in tech and SaaS

Requirements:

• Annual revenue of more than $4m or ARR greater than $2.5m
• Experienced founder with “substantial ownership positions”

Columbia Lake Partners 

Request terms.

Shawbrook Bank 

Offering:

• Quantum: £1m – £10m limit
• Term: 3-year term

Requirements:

• Debt to equity: less than 33 per cent
• Presence of existing investor (VC, PE or family office) in company shareholding
• Enterprise value +£10m (based on previous fund raising)
• Growth of 20 per cent and over forecasted for next 12 months
• Minimum existing sales revenue of more than £2m
• Existing contracts with diversified client base
• Working towards break-even

Barclays 

Request terms.

Finstock Capital 

Request terms.

More on venture debt 

Build Back Better #1 – equity vs debt, which is better?

The post What is venture debt?   appeared first on Growth Business.

The UK’s most active venture capital firms have been revealed after another impressive year for deals.

In total, there were 2,722 equity rounds in 2022 – down 7 per cent on 2021 but higher than years prior. Venture capital and private equity accounted for 1,329 of these.

It was a record-breaking year of fundraising in 2021, which saw over £29.5bn raised by UK businesses. Last year looked on course to replicate that number with more than £14.7bn raised in the first half of last year.

However, that momentum started to dip as rising interest rates, high inflation, the conflict in Ukraine and global recession concerns resulted in investors being more cautious with their cash.

According to a report by KPMG, over £3bn was raised in the final quarter of the year – the lowest level of quarterly investment since the second quarter of 2020.

The total investment total into UK start-ups and scale-ups in 2022 was 16 per cent down on 2021 but still high in relative terms.

London reaped most of the rewards. Companies based in the capital saw 69 per cent of the investment and retained its reputation as the UK’s venture capital hotspot.

The research conducted by Beauhurst found SFC Capital to be the most active venture capital investor, contributing in 99 deals in 2022.

The Cheshire-based VC invests in start-ups from all sectors at seed to Series A stage, typically investing between £100,000 and £300,000 through their EIS and SEIS funds.

Access EIS, managed by Syndicate Room, came second in the list, completing 65 deals in 2022. The Cambridge-based firm is sector agnostic and invests at seed to Series B stage.

The rest of the top five is made up by Octopus Ventures with 54 deals, BGF Growth Capital on 47 and seed fund Ascension on 34.

See also: BGF raises £80m in extra funds through Coutts

The top 10 active venture capital firms are below:

1. SFC Capital
2. Access EIS by Syndicate Room
3. Octopus Ventures
4. BGF Growth Capital
5. Ascension
6. Fuel Ventures
7. Seedcamp
8. LocalGlobe
9. Par Equity
10. Carry Back EIS Fund

More on venture capital

Foresight WAE Technology to invest £20m in engineering start-ups in 2023

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The post Most active venture capital firms revealed appeared first on Growth Business.

Almost one in five European start-ups backed by venture capital firms go bust, according to a new study.

The report by leading European business schools found 22 per cent of investments end in failure and 45 per cent do not secure returns above two-times the investment. However, on a more positive note, 28 per cent of start-ups exceed expectations and almost one in ten produce ten-fold returns.

The report discovered European venture capitalists receive on average 851 investment proposals per year, of which only six per cent lead to investments. While they expect to earn about 30 per cent internal rate of return (IRR) on these investments, the average return they effectively realise is only 13 per cent per year.

What makes a VC investment successful?

A total of 885 European VC investors were asked questions about what makes them invest in certain firms and what makes an investment successful.

The report found 72 per cent of VC investors view the management team’s ability as the most important factor influencing their investment decisions. “This confirms the view that European VCs, to a high extent, select their investments based on the jockey rather than the horse,” Benjamin Le Pendeven, associate professor at Audencia Business School and project leader of the research project, said.

In terms of post-investment success, the investors stated that the offering, such as the product, service or technology has a huge impact. After that, timing, industry conditions, business model and, interestingly, good luck contributes to a start-up’s success.

In terms of value-add offerings by VCs, 83 per cent stated they support their portfolio companies with raising follow-on financing and by providing strategic guidance. A further 75 per cent take seats on the board of directors, 72 per cent help their ventures with connections to potential customers and partners, while 69 per cent provide support in exit processes.

The most common exit route for the VCs is through sales, amounting to 40 per cent of the investments made, while 22 are failures and 7 per cent are IPOs.

More on European venture capital

European tech firms lose $400bn in market value over past year

Concentric launches second fund for European start-ups

The post One in five VC-backed companies go bust appeared first on Growth Business.

So your start-up has resisted an onslaught of initial stressors and is beginning flourish into a medium-sized enterprise. But as might be expected of any adolescent growth spurt, the walls will soon begin to feel like they are closing in and you will have to consider trading your nursery-sized office for something a bit more mature to make way for an expanding staff compliment.

But as any business owner will have come to learn, the first stages of growth can be a bit ‘sturm und drang’ at best, and committing to a bigger rental contract before actually having the bodies to fill the space, can feel reckless.

Anyone who has nursed their fledgling business through its growing pains will know that expanding a business is not necessarily a predictable process.

Small businesses rarely grow in linear, calculable fashion, nor at a pace you can determine at will. You may have set dates for recruiting new staff or deadlines for expanding teams, but often finding the right addition to your company can take months and if you have already had to set aside a desk or small office for that role, it will be wasted until you’ve made a satisfying recruitment.

Then there is the coveted geographic expansion – both exciting and terrifying in equal measure. Setting up shop elsewhere can be a bit trial and error. And if it fails to take off, you may find you have wasted significant funding on overheads you now have to abandon.

This is where business centres and serviced offices in particular should not be overlooked for their potential to offer needs-based office space and their ability to soften the blow of any false-starts.

Building-block office space

Because they can be rented on short-term contracts, serviced offices offer growing businesses the option to simply add more space when they need it and conversely, to choose not to pay for any space they don’t need.

Here it is worth doing the maths though. Depending on where you are based, it could still work out cheaper to go into a long-term contract for a big space. As for any space that goes unused whilst you’re expanding, there is always the option to reverse-engineer the serviced office model by putting your own empty desks up for short-term rent on a site like Deskcamping.

Tying yourself into a fixed contract of any nature is of course only a valid approach if you have a ballpark notion of the rate to which your team will grow.

Try before you buy

Your all-in-one media person has evolved into a three-person team and whilst it initially made sense to have media share space with sales, the crescendoing sales-PR cacophony they are now producing is making it impossible for either team to function.

A frequently undervalued and underused benefit of a temporary office space is the ability to test different office layouts and grouping models before committing to designing and populating your own more permanent space.

People looking to design their own homes are often cautioned to first live in a few houses before firing up SketchUp and expressing their architectural urges. Something similar can be said of office spaces.

With a serviced office you will be able to allocate teams their own spaces and experiment with the practicality of putting teams that frequently collaborate in proximity to each other. Or not. In other cases it may in fact make sense to intentionally put distance between teams to minimise unnecessary interruptions.

Bells, whistles and kitchen sinks

Many serviced offices come with a range of added perks – including a cafeteria or coffee making facility, breakaway spaces, kitted-out conference rooms, media centres and business lounges.

By starting out in a serviced office, you and your staff will quickly get a sense of the facilities and technology that you need and the stuff you can do without.

A sandbox for geographic expansion

Expanding your business to other locations can be risky at best. And when it doesn’t work out, you don’t want to be stuck with long-term rental agreements.

Because many of the larger serviced office companies have business centres across the country, they offer a great way of temporarily setting up a branch in a new location without committing in the long-run. Should you have to pack up, most serviced office providers will be happy with a week’s notice.

Presuming things go well however, serviced offices can make ideal sandboxes for new branches. They usually offer full conferencing and business centre facilities and are typically located close to major transport links. And when you need more space quickly, you will simply be able to add another desk or small office to your package, so you could start with skeletal structure and grow entirely as needed.

Four reasons why serviced offices can sometimes be more cost-effective than leasing

The working environment is changing. After the pandemic a lot of companies have changed their business models, become more financially scrupulous and sought out other, more cost-effective ways to run things. Serviced offices are one option.

Often, they can offer a more cost-effective method for businesses to use professional office space along with all the necessary amenities. Rather than purchasing an office or being tied into paying anywhere from one to ten years of a lease, most offer monthly rents with no need to buy all the overheads too.

Here are 4 key advantages of the serviced office:

Professional receptionists

Personalised services are one of the top benefits provided by the best serviced offices. For that professional edge, those that offer quality receptionists who will undertake tasks such as answering calls, organising the post and greeting clients on arrival are a great choice. They will give off a great first impression for potential clients and employees, without the need to hire some more staff yourself.

High speed and serviced internet

Every business needs access to the fastest, most efficient internet connectivity these days. Serviced office providers can often guarantee the fastest internet speeds, with in house (or at least on-call) IT technicians to prevent fix any issues. This will increase your business’ productivity and reduce downtime.

Available meeting rooms

If your company regularly meets with clients then you will need some professional meeting rooms to play host with. Look for a serviced office that has dedicated meeting rooms away from the general office space, and a system in process that ensures you can easily book one when it is needed. Many will have other extras, like being able to use projectors, IT equipment in the room and even arranging to have food laid on when necessary.

Desirable location

As well as having shorter rents and including all the facilities you need, serviced office companies are now able to offer desirable addresses and locations that can both impress clients and make it easy to access for employees or owners.

See also: Office space to suit

The post The surprising potential of serviced offices for growing your business appeared first on Growth Business.