A Record-Breaking Year for Venture Debt

2024 marked a record-breaking year for U.S. venture debt deals, which reached $53.3 billion in investments. According to PitchBook’s NVCA Venture Monitor, the dramatic increase in venture debt funding—up 94% from 2023—was driven by evolving venture capital (VC) dynamics.

With big AI growth funding rounds absorbing record amounts of capital, ordinary B2B startups have been starved for VC. Those that do garner interest from VCs have to carefully evaluate investor growth expectations and whether they can keep pace before accepting a deal.

What’s driving the surge in venture debt?

• Decline in VC funding: The reduction in VC investments has prompted more startups to seek alternative financing options.
• Cost of equity financing: The rising cost of equity has made venture debt a more attractive option for startups looking to minimize dilution and maintain control.
• Large, late-stage debt deals: There has been a notable increase in substantial debt agreements among late-stage startups that have turned to venture debt as a lower-cost substitute for additional equity financing; startups also use venture debt to extend runway and avoid down rounds.
• Increased availability from lenders: As venture debt proves to be a lucrative and lower-risk financing method for lenders, more financial institutions and non-bank lenders are entering the space, increasing available capital.

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Why Do Startups Choose Venture Debt?

With funding amounts reaching nearly $30 million, venture debt can significantly extend runway at a fraction of the cost of equity, preserving shareholder value and enabling the company to achieve key milestones prior to an equity round raise. This helps founders navigate difficult funding environments, avoid down rounds, increase leverage for future funding, and achieve higher valuations.

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Source: https://www.svb.com/business-growth/access-to-capital/venture-debt-reaches-record-high/

While the rise in venture debt presents more opportunities for founders, it also requires careful financial planning. Startups have to evaluate their ability to meet repayment terms while using debt strategically to fuel growth.

Is Venture Debt Right for Your Startup?

Unlike equity, debt must be repaid, so startup leaders need to understand the impact of repayments on cash flow and ensure the business has a clear path to profitability or future funding.

Revenue Model

Startups with recurring sales, such as Software-as-as service (SaaS) and other subscription-based tech businesses have more predictable revenue streams compared to those operating off one-time sales, and are therefore strong candidates for venture debt. Because these businesses scale easily by nature, they’re likely to generate higher cash flows over time. Traditional banks may not like to lend to these types of companies, which take longer to reach profitability and have few hard assets, but venture debt providers do.

Right-Sizing Funding

As a company’s debt grows, so does the cost of servicing the debt. Debt service includes interest expense, other loan fees and the principal. Though debt costs significantly less than equity, companies and founders potentially get the most value from lower levels of debt when the business is still burning cash and other liquidity resources are tight. Often, the best strategy is to raise follow-on debt rounds as revenue grows, right-sizing venture debt to changing cash needs and business goals.

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This article was developed by Lighter Capital, one of WealthVP’s strategic funding partners. As a key contributor to the content and a valued collaborator on our platform, Lighter Capital shares our mission of helping founders and funders connect more efficiently. We’re proud to highlight their insights and expertise as part of our ongoing commitment to delivering meaningful resources to the startup and investment communities.

What's Next

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