European startups have raised record amounts of debt already this year — and it’s nearly all coming from US investors.
All of the 10 most active debt providers in Europe in the last two years are from the US, based on publicly announced debt rounds compiled by Dealroom and analysed by Sifted. Local debt funds are upping the ante, but the reality remains that the US debt financing market — and its investors — are still far ahead in backing companies globally.
Debt is becoming a more frequent source of funds for European startups as the environment for equity fundraising has become more difficult. Unlike debt, equity investors take an ownership stake when they invest. Debt financing can involve interest payments or give lenders a cut of exit proceeds.
So who are the most active debt providers in Europe, and why are US players dominating the European market?
Though there has been a growing trend of announcing debt rounds in Europe this year, there will still be some that have flown under the radar.
Silicon Valley Bank tops the charts
Silicon Valley Bank (SVB) has come out on top for debt funding into Europe for the second year running. It’s been involved in some of the biggest equity and debt combined rounds this year, including Paddle’s $200m Series D, and the $115m debt component to Wagestream’s Series C.
It’s also been the sole debt provider in some high-profile debt rounds, including Plum’s £5m debt round earlier this month.
Venture debt funds outpace banks
Proportionally speaking, specialist US venture debt firms have outpaced US banks when it comes to Europe’s top 10 debt investments this year. Some 50% of the top 10 debt rounds in Europe were funded by US venture debt firms, including Silicon Valley Bank, Triple Point Capital, Atalaya Capital, SaaS Capital and Liquidity Capital.
Around a third were funded by US banks, including Citi, Goldman Sachs and JP Morgan.
So why has debt financing taken off in Europe this year?
2022 is projected to be a record year for debt financing in Europe, and it’s already far outpaced 2021 for deals: there have been 88 publicly announced debt rounds to date, up from 57 in the whole of last year.
“We’re getting brought into deals to pump up the balance sheet and ensure some liquidity — it’s definitely this focus on runway extension and ensuring a buffer on the balance sheet that’s driving this,” Bailey Morrow, managing director of venture and growth at SVB UK, tells Sifted. She says the majority of VCs are trying to make sure their companies have a minimum of two years' runway — or cash in the bank.
It’s definitely [the] focus on runway extension and ensuring a buffer on the balance sheet that’s driving this
So, if a startup has raised a round and has 18 months' worth of liquidity, they would go to a venture debt lender and try to get an additional six or nine months' worth of debt, to have enough to weather the storm through 24 months.
Furthermore, the perception of debt is changing in Europe, lenders and founders say. Startups and investors in the US have been used to raising debt alongside equity rounds for years — quite the opposite of in Europe, where debt was perceived as a dirty word until very recently.
Finally, startups with specific business models like lending are raising debt.
Koyo Loans is one such startup. It raised a Series A extension of £5m equity earlier this month, combined with a substantial £100m debt facility from New York-based alternative investment advisory firm Atalaya Capital Management — the fifth most active debt funder in Europe this year.
The debt is used to fund our loans to customers — it is the most efficient way to fund this type of structure
“The debt is used to fund our loans to customers — it is the most efficient way to fund this type of structure,” Thomas Olszewski, CEO and cofounder of Koyo Loans, says.
If a lending startup wanted to fund its loan book with equity investment, it would mean that its shareholders would lose a cut of the business to investors, becoming a "very dilutive transaction for the shareholders," he explains.
What currency are European startups lending in?
Most of the large banks — which make up the majority of these deals — are able to lend in multiple different currencies. So, they'll lend debt in whichever currency the underlying borrower is going to spend in most, and whichever currency the majority of their revenue is generated in.
The difference is something that European startups must prioritise when choosing a debt lender right now, investors say. If a funder provides euro or dollar-denominated facilities, this would be problematic for a company with pound-denominated assets and dollar liabilities, for example.
“You can imagine if you’ve borrowed £50m in USD, you now owe £8.5m more than initially planned (GBP/USD is -17% year-to-date) that could potentially wipe out the equity and put the company into bankruptcy,” Olszewski says.
“For those entities, they would need to hedge their exposure — but this would likely have been a requirement of the lender to do so when they signed the deal.”
Amy O’Brien is Sifted’s fintech reporter. She authors Sifted’s fintech newsletter and tweets from @Amy_EOBrien