Startup Venture Debt Rising as Investors Grow Cautious

After a 10-year boom flush with venture capital cash, startups are taking on more risk and debt as investors put away their checkbooks and offer loans instead.

During the good times of high valuations and VCs competing to invest, startups had little need for venture debt, a smaller but growing portion of total venture funding. More than 1,000 startups were valued at more than $1 billion, Bloomberg reported on Tuesday (Sept. 13).

See also: As Traditional Funding Sees Headwinds, Venture Debt Investments Set to Rise  

Now investors are demanding ever-higher returns on capital to compensate for the risk amid a volatile stock market, rising interest rates, and record inflation, PYMNTS reported in March. Global venture funding in February was $10 billion lower than in January. 

The economic landscape is fertile ground for venture debt. Mercury, for example, which focuses on early-stage firms, is targeting $200 million in venture debt extended this year, rising to $1 billion within the next two years, PYMNTS reported.

Venture debt in the U.S. totaled $17.1 billion for the first half of this year, up 7.5% from the first six months of last year, according to PitchBook Data. VC funding totaled $147.7 billion for the same period of 2022, down 8% from 2021. 

Read more: Starting a Startup’s Financial Team — From Outsourced to In-House

The changing landscape of the market has larger financial firms like Blackstone anticipating that venture debt will take on a larger role in the next few years. Blackstone expects to loan $2 billion to growth companies in the coming years, Bloomberg reported, citing unnamed sources with insider information. 

“One of the things that we are having to be very cognizant of is if some founders are raising too much debt on top of what we provide rather than recalibrating their trajectory. They are not disciplining the business and instead pushing much-needed decisions down the road,” Mark Buffington, managing partner of Panoramic Ventures, told Bloomberg. 

Related: B2B Payment Funding Down — But Not Out

The B2B payments space is still finding venture capital, private equity, seed and angel funding, PYMNTS reported last week. Of the top 100 most recent transactions, 10% were in the B2B FinTech space, Crunchbase data showed.