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Venture debt as a new form of financing for start-ups

Dhe life of start-up founders imagines many more dazzling and glamorous than it actually is. Business meetings with champagne and wild parties like in films are in reality faced with bureaucratic duties, such as drawing up a detailed business plan. The meticulous documentation and review of the company is required not only by the regulators, but above all by the financiers of the young companies.

In contrast to established companies, start-ups generally only know one option as a source of money: equity. But a new form of financing, the so-called “venture debt”, is spilling out of America to Germany and Europe. Even if the idea is not new, founders in Germany could be given greater flexibility in choosing their financing. But what exactly is a venture debt?

Roughly speaking, this is debt capital that is made available by risk investors. The companies repay the money, like a loan from the house bank, at regular intervals, including interest and principal payments, from the start. Only that the funds do not come from the bank, but from a specialized venture debt fund, which, however, requires quite high interest rates. As a rule, start-ups are out of the question for traditional debt financing, for example in the form of bank loans. Financial institutions require personal collateral or the presentation of balance sheets, which start-ups cannot yet offer.

Companies rely on venture capital

Instead, the young companies have so far mainly relied on the money from venture capitalists, also known as venture capital companies (VCs). These collect money from investors that goes into a fund. The money bundled in it then flows to the start-ups in financing rounds. The price that start-ups pay for equity is high because venture capitalists receive shares in the young companies. The venture capital is paid out via the “exit”, as the jargon says. This happens when the start-ups go public or are sold. The profit from this is then shared among the investors.

While companies are funded in the very early stages through classic equity, this does not apply to venture debt. This is particularly suitable for already established companies, says Götz Gleichmann, head of Bridge To Growth (BTG) in an interview with the F.A.Z. Together with the venture capital company Redstone, the company has launched a venture debt fund to enable this form of financing. The fund is initially set to run for eight years and has a volume of EUR 125 million.

The companies are actually “low-risk candidates,” Gleichmann said. In order to be considered for venture debt, everything had to be there: the product, the market, the team. In addition, the founders must have had several rounds of financing at the time. In addition, the company and business model have been put through their paces several times – also called “due diligence”.

Not suitable for all industries

Venture debt is interesting for companies from many industries, says Gleichmann. However, some do not meet all criteria, such as the biotech industry. The business model is not aimed at profits, but at milestones in the scientific field. Another criterion for the startups is a certain growth. Otherwise venture debt financing would make little sense, said Gleichmann.

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