“For a long time, especially in Europe, the thinking has been very narrow-minded in the direction of raising equity, not really thinking about other avenues,” said Jens Munk, co-CEO of Germany-based Deutsche Handelsbank, which provides venture debt and financing for digital startups and growth companies.
“This is changing fast right now as founders start to think much more strategically about the capital stack and who and when they let people on to their cap table and what kind of dilution they are willing to take,” he said.
That capital stack now can include debt, as well as revenue-based financing and other tools that revolve around recurring revenue numbers, as European startups — sometimes helped by U.S. financial institutions — look at different ways to fund themselves aside from knocking on the doors of venture capital firms.
Growth of revenue-based offerings
Some of the fastest-growing ways to get capital in Europe without losing ownership stake are the various forms of financing based on subscription and recurring revenue — basically where a company can borrow against future revenue or contracts at a discount.
While the money needs to be repaid — along with the discount fee (obviously) — no stake is lost in the company, letting founders keep full control of their company.
“I started seeing an alternative financing market coming up in the U.S. a couple of years ago and thought I need to start that here,” Henrik Grim, who at the time was working in the European venture capital world at London-based Northzone, said with a laugh.
Grim recently became European general manager of Capchase, a nondilutive, venture-funding alternative that offers upfront capital to companies with recurring revenue. The New York-based platform recently launched in the U.K. and Spain after a $125 million Series A last month and expects to be in much of the continent by the end of the year.
Capchase is not alone in Europe. In the last 24 months, several other firms have sprouted up to offer similar financing options. Revenue-based financing platform Uncapped — founded in 2019 in London — raised $80 million of debt and equity in May. Berlin-based Re:cap closed a small pre-seed that same month, and fellow Berlin counterpart Uplift1 also has popped up on the scene to offer founders financing options.
Munk said while venture debt as a product is growing faster throughout Europe, he has noted some of the new tools that have sprung up in the last couple of years.
“Other forms of nondilutive finance are also being introduced but are still at the very early stages,” he said. “I expect revenue-based finance to become a fixture and an accepted way of financing certain companies at certain stages.”
Although just recently launched, Capchase’s numbers seem to bear that out. The company has seen significant demand — now working with 50 customers in Europe and making close to $118 million available in the market, Grim said.
“I think this is something that interests this market, but you have to remember this is a less mature venture market in general than the U.S.,” Grim said. “But this is definitely a fast-moving market and something founders want.”
European founders also seem to be looking at debt and venture debt more as another option for financing — a market that is more mature in Europe than other alternative financing methods due to large banks like Santander, Barclays and European Investment Bank offering it for years.
Just last month, Berlin-based e-scooter company Tier Mobility raised $60 million in an asset-backed financing — basically a loan — from Goldman Sachs. The month prior, another Berlin-based startup — e-commerce holding company Razor Group — closed a Series A+ round of $400 million in a mix of debt and equity. Earlier in the year, England-based integration platform Matillion raised $100 million in a Series D that included financing from Silicon Valley Bank UK.
While data around venture debt can be hard to trace, a study published late last year by London-based venture firm Atomico in collaboration with Silicon Valley Bank estimated venture debt activity in Europe has increased between 6x and 8x in the last decade. It estimated the market was around $1.5 billion last year.
David Spreng, chairman and CEO of Runway Growth Capital, recently closed a venture debt deal in Germany and said that while he sees venture debt on the rise in Europe, it still lags behind the U.S. market.
Runway sees about 15 percent of its total deals come out of Europe, but Spreng said he has seen numbers where only about 5 percent of the venture market in Europe is debt while it’s been estimated it makes up about 15 percent of the U.S. market.
Different markets, different cultures
While the growth may be coming, there are several reasons why debt — and other alternative fillings — have been slower to catch on in Europe, according to those involved in the industry.
One obvious thing to remember when looking at the numbers is that many successful startups eventually leave Europe and move across the ocean where they can more easily raise large growth rounds — which can include debt — and be in its largest customer market, Spreng said.
There also is the issue that every country in Europe has its own laws and regulations that must be dealt with, so doing things cross-border can be more difficult, he added.
Some also believe there is a stigma in Europe that hinders things like debt.
“There is definitely a negative bias in the European market,” said Grim, adding there is a lack of education in the market and understanding that debt terms have become more refined and favorable to founders in what is a more competitive debt market.
Another stigma is that bringing on debt can make fundraising more difficult down the road, Munk said.
There is some truth to that, and founders need to make sure they do not take on too much debt and need to pay attention to how deals are structured, Munk said. However, that is no different compared to the difficulties liquidation preferences and high valuations can present if in venture funding.
“It is changing however, and I expect that to continue and pick up speed as the venture debt providers educate the market,” he said
Blair Silverberg, CEO at New York-based Hum Capital — which provides nondilutive alternatives to founders — said about 5 percent of his firm’s business is in Europe and he sees a robust, growing market there.
He added it’s important to remember that the U.S. is the most competitive capital market in the world and sometimes there is slight delay in other areas adopting new methods.
“Maybe there is a five- to eight-year delay in Europe,” he said, “but I’m not sure it will take that amount of time to get there.”