Debt: A New Financing Route for Startups

Debt financing is no longer just for late-stage tech startups.
While debt has traditionally been used by late-stage technology startups, more and more companies—including those at earlier stages—are turning to debt as a viable funding option.

Last month, Udacity, an edtech company, announced that it had raised $75 million in debt financing from Hercules Capital. Similarly, electric vehicle startup Envoy secured $70 million in debt from Macquarie Group, and in September, another edtech firm, Skillsoft, raised $75 million in debt from CIT Group.

Although precise data on the number and value of such deals is limited, Blair Silverberg, CEO of Capital Technologies, a venture debt firm, notes a marked increase in founders exploring debt-based funding—especially those who wish to raise capital without giving up equity.

Silverberg explains that, just in the past two weeks, he has seen a surge in venture-backed companies—particularly in the SaaS (Software as a Service) space—taking on debt to grow their asset base.

The Rise of Venture Debt
Although venture capital remains the standard path for funding tech startups, the use of debt has steadily grown, especially after the Great Recession. Around 2012, lenders began offering high-interest loans, while fintech startups like AngelList and CircleUp introduced alternative funding mechanisms to meet the capital needs of the tech ecosystem.

Still, debt financing is far from mainstream in the startup world. Only about 2% of early-stage startups use debt as a primary funding method, compared to nearly 30% of companies in the S&P 500 that rely on debt capital.

Risks and Trade-offs
Despite its advantages—such as lower cost of capital—venture debt carries its own risks. Leveraging a business that lacks a proven model or predictable revenue can be precarious, particularly for early-stage startups.

Whether this trend stems from the broader tech boom or the financial disruptions caused by COVID-19, one thing is clear: more startups are embracing debt as a flexible and potentially non-dilutive alternative to traditional VC funding.

۲۰۲۰ , Chris Metinko

[۱] late-stage startups

[۲] edtech

[۳] venture debt

[۴] SaaS (Software as a Service)

[۵] The Great Recession