Growth debt is a form of business financing that involves borrowing funds from specialized lenders, typically dedicated growth debt firms. This financing option became particularly notable following the collapse of Silicon Valley Bank last year, highlighting its critical role in the tech industry as valuations deflated and businesses faced significant challenges.
In Europe, only a small percentage of venture capital-backed businesses, typically ranging from 2-5%, are deemed eligible for growth debt. The stringent criteria highlight the super-selective nature of growth debt financing.
Characteristics and Suitability
Growth debt is specifically tailored for startups and high-growth companies, providing an alternative to traditional bank loans or equity financing. Unlike conventional debt, growth debt is designed to meet the unique needs of sophisticated and mature startups.
While not suitable for every startup, there are certain key indicators suggest a company may be well-positioned to consider growth debt as part of its capital structure.
Key Criteria for Growth Debt Eligibility
- Venture Capital Presence: At least one, ideally two, venture capitalists (VCs) on the company’s cap table. The presence of VCs signals trust and confidence in the startup’s business model and growth prospects. VCs provide not only financial support but also strategic guidance and industry connections, making the startup more attractive to growth debt providers.
- Solid Unit Economics: The business needs to demonstrate that its core operations are profitable on a per-unit basis. Lenders offering growth debt are more likely to extend credit to companies with a clear and sustainable path to profitability, and concrete KPIs such as a timefrom to profitability, estimated year-on-year growth, or other such indicators. This ensures that the borrowed funds can be used effectively to drive growth without jeopardizing the company’s financial health.
- Intellectual Property and Technology Development: This typically signals that the business has valuable intellectual property, and has consistently pushed research over the years, providing a strong foundation for continued innovation and growth.
- Sophisticated Financial Management: To access growth debt, companies need to have a sophisticated CFO, solid finance functions and robust forecasting abilities. The repayment of the debt service and high standards of reporting to the lender demand a high level of discipline and good financial processes.
In conclusion, growth debt is a strategic financing option best suited for a select group of startups with specific characteristics. These include a focus on growth, the presence of VCs on the cap table, proven unit economics, a strong foundation of patents and backing for technology development and disciplined CFO and finance processes. Companies meeting these criteria may find growth debt to be a valuable tool in accelerating their growth and achieving long-term success.
