Accelerating growth with Venture Debt

In the first nine months of 2020, VC funding to Irish SMEs was up 39% to €786m versus the same period last year. Although a proportion of this VC funding was targeted towards supporting existing portfolio companies, there were a number of large new investment rounds that took place, such as the €65m raise by Let’s Get Checked and the €73m raise by Fenergo, both of which closed in Q2 2020.

Buoyant equity markets supported venture debt activity in 2020 as companies sought to avail of non-dilutive growth, capital to accompany their VC raises. We also saw venture debt providers support non-VC backed businesses as demonstrated by Silicon Valley Bank’s reported financing with Teamwork, a software development company based in Cork. Across Continental Europe and the US, economic uncertainty in 2020 heightened the focus and importance of venture debt to high growth businesses.

Where the pandemic’s swift impact left many VC-backed companies struggling with capital runway, and uncertainty over equity valuations, venture debt lenders were quick to provide non-dilutive bridge financings to extend runway until trading normalised and valuations improved. The market for venture debt globally has been further supported by low interest rates and high levels of dry powder amongst venture debt funds who are eager to deploy. Looking forward to 2021, we see venture debt continuing to play an important role in financing growth for VC and non-VC backed businesses in Ireland. As we further discuss in this report, VC-backed businesses can consider raising venture debt as a supplementary source of non-dilutive capital as part of a new funding round.

Given the uncertain economic outlook, venture debt can be also be considered as an insurance policy against running out of cash runway to the next milestone. In such instances, venture debt can be structured as an undrawn line, to be called upon as and when required. We also expect to see high growth non-VC-backed businesses who do not necessarily meet the lending criteria of traditional senior lenders, to continue to avail of venture debt in 2021. For such businesses, venture debt proceeds can be used for working capital requirements or growth capex, including acquisitions.