Global startup funding hits lowest level in five years
Blending traditional venture capital approaches with venture financing can provide a flexible solution for cash-strapped companies, says Andrey Lebedev, who as a venture partner at U.S.-based venture capital funds such as Amadeo Global, works on ad-hoc fundraising strategies for innovative companies.
Venture capital is becoming more expensive for tech founders who don’t want to part with large amounts of equity, Lebedev said. “Rising interest rates are also making it more difficult for venture funds to invest in startups,” he added. Lebedev emphasized that startups’ focus is shifting. “Tech companies are looking to diversify their funding sources, including bank loans and fintech platforms,” he said.
In Europe, for example, national programs are set to provide around €60 billion to technology founders in 2023. In contrast, venture-funded platforms are more prominent in the United States. Venture debt, another popular strategic tool, supports sustainable growth and long-term success for startups and their investors.
The future of venture debt post-SVB
“SVB’s collapse in March 2023 raises concerns about the future of venture debt, which SVB has promoted,” Lebedev said.
Venture debt is designed specifically for startups and fast-growing companies that have already secured VC equity funding. It allows these companies to raise additional capital without diluting the ownership interests of founders and investors.
“However, SVB’s collapse was not due to any inherent flaw in venture debt, but rather the result of a typical bank run exacerbated by the concentration of its client base in startups and venture capital funds,” Lebedev noted. Despite this setback, venture debt remains an attractive and essential financing tool for startups.”
Typically, venture debt is used to extend the runway between equity rounds, fund capital expenditures, or provide a buffer during periods of uncertainty.
Despite SVB’s collapse, the fundamental benefits of venture debt remain intact: Demand for non-dilutive capital solutions continues to grow, driven by startups’ need for flexible financing options that support growth without compromising ownership and control.
“As the market evolves, we can expect to see increased diversification, innovation and risk management making venture debt even more attractive,” Lebedev said. Moreover, other financial institutions and specialized venture debt providers are well positioned to fill the void left by SVB.
Hybrid Model: A New Approach
Amadeo’s hybrid venture credit model combines venture debt and mezzanine financing. This approach allows for a shorter investment horizon (2-3 years) compared to traditional venture capital (5-7 years) with the potential for similar returns.
“Mezzanine and debt financing options, including optional securitization, allow for control over loan repayments and provide a more attractive proposition for startups and investors alike,” Lebedev said.
Similar investment firms use a depository scheme (DSE) system, which allows loans to be automatically repaid by debiting the company’s account when they receive them. The system is relatively new in the U.S., but similar mechanisms have been used around the world for a long time, Lebedev said.
Comparing the U.S. venture capital environment to Europe, he said “advanced payments systems and financial discipline give investors a unique advantage.”
“In the US, credit ratings and reputational risk play a key role in business development, making hybrid venture credit models, which offer a structured approach to financing, more attractive.”
The evolution of venture finance
Lebedev believes the hybrid venture credit model is the future of startup investing: “This model effectively addresses the need for flexible financing and rapid expansion without significant dilution of founders’ equity,” he said.
As technology advances and AI-powered financial analytics becomes more prevalent, funds that adopt these innovative techniques will gain a competitive advantage.
The collapse of SVB has sparked a rapid wave of innovation and new entrants into the venture debt space, who are often more agile and better equipped to understand the unique needs of startups, offering customized solutions that can add even greater value.
“Amadeo’s hybrid venture credit model is an attractive alternative to traditional venture capital, offering a flexible, growth-oriented financing solution,” Lebedev added.
This innovative approach has the potential to guide the evolution of venture financing and more effectively serve the needs of startups and small businesses in a tough economic environment.
