Are Debt Financings The New Venture Round For Fintechs Startups?

Are Debt Financings The New Venture Round For Fintechs Startups?
Are Debt Financings The New Venture Round For Fintechs Startups?

Last week, I wrote about Founderpath, an Austin-based company that offers debt financing to B2B startups.

As I started thinking about debt and credit facilities as increasingly attractive alternatives for startups who are seeking capital — especially during a downturn such as the one we are currently experiencing — I realized that the number of companies that were securing debt capital or credit facilities appeared to be on the rise. This could be for any number of reasons. Some founders might be struggling to raise venture dollars, while others don’t want to — preferring not to dilute ownership.

On August 8, Mexico City–based expense management startup Clara announced it had been approved for financing from Goldman Sachs for up to $150 million. The facility, it said, would allow Clara to continue to grow its corporate card, accounts payables and short-term financing offerings for businesses in LatAm. The company says it’s currently working with over 5,000 businesses across Mexico, Brazil and Colombia with ambitions to double that number by year’s end. Notably, Clara was believed to be valued at about $130 million at the time of a $30 million raise in May of 2021. Just eight months later, it had raised a Coatue-led $70 million Series B and achieved unicorn status.

Here in the U.S., Yieldstreet announced on August 11 that it had secured a $400 million warehouse facility from Monroe Capital LLC. A spokesperson from the alternative investment startup told me that the financing is the largest of its kind to date for Yieldstreet. In June of 2021, I covered Yieldstreet’s $100 million Series C at “near unicorn” status. In announcing its latest financing, the company said it has had more than 400,000 users since its 2015 inception and more than $3 billion in funding across an ever-evolving suite of investment products. The spokesperson also told me: “This isn’t normal corporate debt — it uses a warehouse facility, which means it is targeted to support the creation of new funds and products for Yieldstreet’s platform — growing the number of available investments for users, rather than general ops or expenses.”

A quick note about the difference between warehouse facilities and debt financings — debt is lending capital for operating reasons. Warehouse facilities are essentially a line of credit.  (Thanks to TC+ editor and resident finance expert Alex Wilhelm for the lesson.)

Healy Jones, VP of FP&A at Kruze Consulting, noticed my recent tweet about seeing a lot of debt financings and shared the following via email:

“Lots of reasons this is happening, but a big one is the drop in equity valuations is driving founders to find less dilutive ways to extend runway in the hopes that they can grow into at least a flat round.”

Kruze COO Scott Orn, who used to be a partner at a venture debt fund, added his own thoughts via email:

  • You have to plan ahead for venture debt. Put it in place relatively soon after an equity financing. That way there is no adverse selection for the lenders; everyone (founders, VCs and lenders) around the table is happy at that time. If you try to put something in place with less than six months of cash, you will not be able to get debt. If you put it in place after an equity round, you can draw it down way into the future — that’s called a forward commitment/drawdown. That gives the startup a lot of optionality.
  • It’s super important to understand all the terms. Often, founders don’t realize there are things like funding MACs, investor abandonment clauses, etc. These terms can be used by the lender to block the startup from either drawing down the money or creating a default after the money has been drawn. Either way, the company is in trouble and can’t count on the capital. So you really need to know your lender, have your VCs know your lender and pay attention to your terms. This is why we created the Sample Venture Debt Term Sheet, to explain all the terms.
  • Don’t borrow your own money. Often lenders will structure a deal with a lot of covenants, including minimum cash requirements. For example, they will lend you $4 million if you keep $2 million in the bank at all times. In that case, you’re really only getting $2 million of new capital. Furthermore, the threat of an investor abandonment or MAC clause can keep you from really using the money as well.
    • While startup interest in venture debt is up a lot, lenders are getting more conservative. Across the board, startups are asking us about venture debt way more often. Simultaneously, when I talk to the lenders, they are reducing the dollar sizes of new commitments, reducing interest-only periods, asking for more warrants and being much more picky about which startups to lend capital to.

    On my end, I know of at least two other fintechs planning to announce debt raises and/or credit facilities in coming weeks. So, this definitely feels like a trend.