Last month, the accounting startup Bench abruptly ceased operations after its lenders demanded the repayment of a loan. Similarly, the digital freight firm Convoy encountered financial difficulties in late 2023, prompting venture lending company Hercules Capital to take control in an effort to recoup its investments.
Divvy Homes recently sold for around $1 billion to Brookfield Properties, yet several shareholders were left without any financial returns, as reported by TechCrunch. While the exact influence of Divvy’s creditors in this transaction remains uncertain, the company had borrowed $735 million in 2021 from firms such as Barclays, Goldman Sachs, and Cross River Bank.
Following the influx of funding into weak startups during 2020 and 2021, many of these companies have already failed. However, data indicates that we have not yet reached the lowest point, and numerous startups may collapse in 2025. Venture debt, which amounted to $41 billion across 2,339 transactions—a record high—in 2021, will be a contributing factor, according to Silicon Valley Bank.
“We are nearing a crisis point for many firms,” stated David Spreng, founder and CEO of Runway Growth Capital, a venture debt provider.
In light of their investments’ uncertainty, lenders are increasingly urging startups to pursue sales as a strategy to mitigate potential losses, Spreng suggests.
John Markell, managing partner at venture debt consultancy Armentum Partners, estimates that nearly all lenders currently have struggling companies in their portfolios.
While debt can assist rapidly growing startups in managing their cash flow without relinquishing equity to venture capitalists, it also presents increased risks. Excessive debt relative to a startup’s earnings or cash reserves can lead to emergency sales, where a company is sold for considerably less than its previous valuation. Alternatively, lenders might pursue foreclosure on secured assets to recover some of their investments.
Startups can stave off lender actions if they manage to convince new or existing venture capitalists to invest additional capital by purchasing more equity. Some venture debt agreements include liquidity and working capital ratio stipulations; if a startup’s cash balance falls too low, the lenders could take immediate action.
Nonetheless, investors are hesitant to continue funding startups that are expanding at a pace insufficient to justify their exorbitant valuations from 2020 and 2021.
“At this moment, we see a plethora of troubled companies,” Markell noted. “Many unicorns might not survive much longer.”
Spreng forecasts that many startups will have to sell at a loss or shut down within the year. For now, however, most lenders remain optimistic that these startups can find a buyer, even if it means a fire sale.
In cases where lenders are driving an acquisition, equity investors are typically left with little to no remuneration from the sales, often not recouping their initial investments, according to Markell. Investment losses are a common risk that venture capitalists are prepared to face.
When sales do occur, many transactions go undisclosed due to unfavorable outcomes for venture investors. No one wishes to celebrate when facing a financial loss from a sale.
Nevertheless, since debt holders receive priority on repayments, venture lenders are less likely to lose their entire investment.
Despite the inherent risks, the allure of venture debt remains strong. In 2024, new venture debt issuance peaked at $53.3 billion, the highest in a decade, according to PitchBook data. A substantial amount of that funding was allocated to AI firms, such as CoreWeave, which secured $7.5 billion in debt financing, and OpenAI, which received a $4 billion line of credit.
Compiled by Techarena.au.
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