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Analysis Venture debt
Venture debt lenders gear up for growth
by Kathryn Gaw & Lisa Fu
Lending to venture capital-backed companies is hitting an all-time high in the US and Europe, with AI, enterprise software, fintech, sustainability and biotech among the busiest sectors
Without venture debt, the world would be a much less exciting place. No more haggling for bargains on Facebook Marketplace, a distinct lack of AI chatbots and a dearth of organic snacks.
Of course, the venture capitalists will argue they got there first, but the addition of venture debt can have a powerful effect on a company’s growth. It allows innovative firms to extend their cash runway without further equity dilution, at a crucial point in their evolution (see box).
“Venture debt is essential for many late and growth-stage companies that want to scale without giving up unnecessary equity,” says David Spreng, founder and CEO of Runway Growth Capital. “I’ve seen first-hand how a well-structured debt facility can empower a company to invest in customer acquisition, expand product lines, or bridge to a higher-valuation equity round.”
Record lending in 2024
A recent report from Runway Growth Capital found that venture debt financing hit a new record in 2024, with total deal value exceeding USD 53bn. Meanwhile, a paper by Houlihan Lokey, published in June, reported that in 2024 European venture debt volumes reached an all-time high of EUR 25bn across 545 transactions.
“The venture debt market is very robust right now,” says Trinity Capital CEO Kyle Brown. “Every once in a while, one of these companies becomes the next Google and you have a nice year of returns for investors.
“It’s a model that’s worked for many decades, and I think the most interesting thing is that as the private credit markets have grown, it’s really just solidified itself as a real model that works in good times and bad.”
Venture debt players*: stock price ($)
Source: Google Finance * These BDCs also pursue other areas such as equipment finance or direct lending
Venture debt lenders have financed household names such as Facebook, Ancestry.com, organic food company Annie’s, hair dye company Madison Reed and seller of diamond engagement rings Brilliant Earth. They are most commonly associated with tech lending and the innovation economy, with the majority of venture debt firms basing themselves in Silicon Valley. But over the past couple of years they have been quietly expanding across the US, and even further afield.
The US market is dominated by five big venture debt lenders: Hercules Capital, Trinity Capital, Runway Growth Capital, Triple Point and Horizon Capital. These companies have deep pockets, long track records and well-established relationships, which can ensure good quality deal flow.
We do real underwriting on real companies
David Spreng
Founder and CEO
Runway Growth Capital
“In the venture world, our good deals would make 20, 30, 40, 50, even 100 times our money, so you can afford to lose on a whole bunch of others,” says Spreng of Runway Growth Capital. “But we do real underwriting on real companies. They may not be profitable yet, but we still have a very sophisticated underwriting process and model that we use to price the debt. As a result, we’ve achieved one of the lowest loss rates in the industry.”
Venture debt has sometimes been seen as one of the riskiest corners of private credit, where large deals can result in large losses. That can make the business complex for traditional cashflow lenders to manage.
The March 2023 collapse of venture debt specialist Silicon Valley Bank (SVB) seemed to confirm this theory that the sector was simply too risky. But while SVB’s bankruptcy sent shockwaves through the market, industry experts are quick to point out that the bank’s downfall was no reflection of the viability of venture debt. Most of SVB’s loan book and activity was early stage rather than growth stage, and the bank’s failure was due to a surge of withdrawals rather than the failure of its venture debt investments.
Two-and-a-half years on, the venture debt market shows new life. In fact, there is a case to be made that the failure of SVB has sparked growth across venture debt.
“All these folks who left SVB are now in different roles in different banks — a lot of them are trying to stake out their own name... pitching to them the idea of opening up a venture debt arm or venture debt desk,” says Shams Billah, partner at Barnes & Thornburg. “I think that will provide lots of different opportunities for borrowers as they see lots of different types of lenders coming into the space.”
In the aftermath of SVB’s collapse, HSBC snapped it up for £1 and quickly established HSBC Innovation Banking, staffed by a number of former SVB executives. This move signalled another emerging trend in the space — bank partnerships.
“We have seen a number of banks start to dip their toes in the venture debt market,” says Sonya Iovieno, head of venture and growth banking at HSBC Innovation Banking, and former head of venture and growth banking at SVB. “With the drive from governments to champion tech and AI, there is certainly encouragement for banks to provide support to the ecosystem.”
We have seen banks dip their toes in
Sonya Iovieno
Head of venture & growth banking
HSBC Innovation Banking
In the US, Trinity Capital is already working in partnership with banks. “We have intercreditor subordination agreements,” says Brown. “We can become a mezzanine layer for more mature companies and bring a bank in. We do that quite often. In some cases, they fully amortise after a certain period.”
“JPMorgan Chase is opportunistic in the venture debt market with its tech banking practice,” adds Joe Morrison, partner at Barnes & Thornburg. “We also see Customers Bank, which is pretty active in the Midwest, Western Alliance Bank and their affiliate Bridge Bank, doing a ton of these deals.”
Bank partnerships could fuel the next wave of venture debt lending, particularly as deal sizes grow. But it is not just in the US where opportunities abound. Europe appears to be the next frontier.
In April 2023, BlackRock acquired London-based venture debt specialist Kreos Capital, in what was seen at the time as an attempt to gain a foothold in the space. That business now sits within BlackRock’s Private Financing Solutions platform, created through BlackRock’s acquisition of HPS Investment Partners, but a company spokesperson confirmed to Creditflux that “the Kreos business remains focused on growth and venture debt financing”.
Different types of lender will come into the space
Shams Billah
Partner
Barnes & Thornburg
Runway Growth Capital said earlier this year that it is considering establishing an office in Europe, with a particular focus on the UK, Germany, France and Ireland. And last year Trinity Capital announced a strategic expansion into Europe, and now has a team based there.
“We see a ton of opportunity [in Europe],” says Brown. “But the market is not incredibly robust yet.”
Brown notes that a lot of European venture capital comes from the US, so the expansion felt like a natural bridge for the firm. “We felt like the timing was right because of the amount of untapped opportunity,” he adds.
However, the European expansion of venture debt comes with challenges. In the US, venture debt usually refers to a term loan debt structure, with no financial covenants and common features provided by all lenders. Iovieno says that in the UK and Europe, new entrants are using the term ‘venture debt’ as a catch-all to describe any form of debt provided to loss-making venture capital backed companies.
“The result is an array of options from traditional US-style venture debt term loans to covenanted debt, to receivables and IP based structures, as well as quasi-equity convertible loan notes,” Iovieno says. “We’re optimistic about the long-term prospects for the UK and European markets with more repeat founders, successful exits and VC investment coming into the market.”
Taking on venture capital in Europe
European regulation can be difficult for US firms to navigate, with rules often changing on a country-by-country basis. Yet the opportunity is undeniable. According to Houlihan Lokey’s recent venture debt report, between 2014 and 2016 venture debt accounted for approximately 8% to 9% of the European venture capital market. By 2022, its share had risen to 22%, and last year it reached 42%. The firm attributed this to significant shifts in the start-up financing landscape, which caused equity-based funding to skew towards higher-quality assets and more mature ecosystems in 2024.
“Within this challenging fundraising environment, as central banks progressed along the path of interest rate normalisation and start-ups postponed equity-based fundraising in anticipation of more favourable conditions, venture debt became an increasingly vital financing option,” the report noted.
“I have a feeling it’s just a matter of time for the European market to get used to a lot of the terms we see here in the US,” says Billah.
The European opportunity is substantial, but there is still plenty of growth potential in the US market. The rise of AI is generating an abundance of business for Silicon Valley-based venture specialists, while Iovieno says she is seeing lively activity across enterprise software, fintech, hardware, sustainability, gaming, cybersecurity, life sciences and biotech.
Everyone wants to finance the next Facebook, and in a challenging fundraising environment, venture debt firms have more opportunities to strike gold than ever before. However, the Big Five may face tough competition from ambitious banks and hopeful new entrants.
“People who are not currently very active in the market need to educate themselves about what venture debt is,” warns Morrison. “I would expect more volume, and I’d expect more competition. I think it’s going to become a much more regular part of the Series A or a post-Series A financing mix.”
What is venture debt?
Venture debt is private financing that is provided to start-up and post-start-up companies during a growth phase. It typically follows venture capital.
Who uses venture debt?
Venture debt is usually used by venture capital-backed companies, usually in innovative industries. Rather than taking on more equity partners, these companies might prefer to opt for a loan which can allow the founders to maintain more control.
How much does it cost?
In general, pricing is in the mid-teens and above, but the company’s risk profile, size, stage, and the structure of the loan all have an impact.
Lenders may also charge an upfront fee and may take a warrant position to participate in the upside. (Warrants give lenders the right to purchase equity at a fixed rate once certain milestones have been reached.)
Pricing is reflected in the yields delivered. For example, Runway Growth Capital reported a dollar-weighted annualised yield on debt investments of 15.40% for the second quarter of 2025.
What is the risk?
Many start-ups fail before turning a profit. However, one venture debt firm told Creditflux its default rate was below 1%.
Recently, later stage companies have attracted venture debt financing. They tend to have consistent revenue streams, with a clear path to profitability.
