Growth Debt

Growth debt is a financing solution tailored to early-stage companies that can be a supplement to equity financing. Growth debt extends a company’s runway to the next value creation point while minimizing dilution. Growth debt has been present in the US market since the 1970s and is widely used by startups. The value of growth debt transactions in 2020 amounted to over US$ 27bn, accounting for almost 18% of all investments into VC-backed companies in the USA. For US startups, growth debt has been an essential part of building the best tech companies in the world. Despite Europe being a significantly younger and more fragmented startup ecosystem, growth debt has been thriving in the region for the last twenty years. In 2020, the amount of growth debt transactions in Europe reached €1.5bn, ca. 5% of the total funding provided to VC-backed companies in the region. As the ecosystem matures, more and more startups decide to fuel their growth with growth debt financing as a complement to equity.

"At times of market uncertainty, growth debt can be used to extend a company’s cash runway and give it more flexibility when it comes to the timing of its next equity round. Typically, in this situation growth debt is raised alongside a convertible round. During favourable markets, growth debt is an ideal complement to an equity round as a non-dilutive source of capital."

"Growth debt is a financial product positioning itself between equity and traditional bank financing. Equity financing is the most popular and readily available capital source for early-stage companies, but it is also the most expensive capital source – founders and early investors are diluted and face a deterioration in their liquidation preference. Bank financing is on the opposite side of the spectrum, being the cheapest financing available to companies. However, banks are usually unable to finance smaller companies that are undergoing rapid growth and are unprofitable as a result. Banks also generally need physical assets as collateral and the loans are usually subject to financial covenants. Growth debt fills the gap between these two financing options, being able to finance fast-growing, but still loss-making and asset-light businesses. It is more expensive than bank financing, with interest rates being at low to mid-teen percentage points, but it does not dilute the company’s founders or equity investors and it generally comes without financial covenants, facilitating the company’s growth path. "

"VC-backed companies around the world use growth debt. The product has the longest history in the US, where approximately 15% of all funding for VC-backed companies. In Europe, the use of growth debt is becoming more common, however, it contributes a significantly lower percentage of total funding for VC-backed companies at approximately 5%. Traditionally, European growth debt providers have mostly been focused on the UK and Western Europe. The extended Central and Eastern Europe market is estimated to account for just 3% of all growth debt deals, according to Deloitte. Instead, European founders have historically used traditional equity or rarely, where available, bank financing — and are often unfamiliar with the specifics of growth debt funding, although this is rapidly changing due to the appealing nature of growth debt as a complement to other forms of financing."