Shaping the Future of Startup Funding with a New Hybrid Venture-Credit Model

11 Jul 2024

Global startup funding has hit its lowest level in five years, according to Crunchbase. Rather than prioritizing rapid growth, founders are now concentrating on achieving profitability quickly.

Merging traditional VC approaches with venture lending could provide a flexible solution for cash-strapped businesses, says Andrey Lebedev. As a venture partner at U.S.-based VC funds, such as Amadeo Global, he is working on ad-hoc financing strategies for innovative companies.

Venture capital has become expensive for tech founders who don’t want to give away substantial equity, says Lebedev. “Also, high interest rates have made it more challenging for venture funds to invest in startups,” he added. Lebedev emphasizes a shift in focus for startups. “Tech companies are looking to diversify financing sources, including bank loans and fintech platforms,” he said.

In Europe, for example, state programs provided around 60 billion euros in 2023 to tech founders. In contrast, venture-funded platforms are more prominent in the U.S. Another popular strategic tool – venture debt – supports sustainable growth and long-term success for startups and their investors.

The future of venture debt after SVB

“SVB's failure in March 2023 raised concerns about the future of venture debt, a product SVB had championed,” Lebedev said.

Venture debt is designed specifically for startups and high-growth companies that have already secured VC equity funding. It provides these companies with access to additional capital without diluting the ownership stakes of their founders and investors.

“However, SVB's demise was not due to the inherent flaws of venture debt but rather it was a result of a classic bank run, exacerbated by the high concentration of its customer base in startups and VC funds,” Lebedev noted. Despite this setback, venture debt remains a compelling and vital financing tool for startups.”

Typically, venture debt is used to extend the runway between equity rounds, finance capital expenditures, or provide a buffer during periods of uncertainty.

Despite SVB’s collapse, the fundamental advantages of venture debt remain intact. The demand for non-dilutive capital solutions continues to grow, driven by startups' need for flexible financing options that support their growth without compromising ownership and control.

“As the market evolves, we can expect increased diversification, innovation, and risk management to further bolster the appeal of venture debt,” Lebedev said. Moreover, other financial institutions and specialized venture debt providers are well-positioned to fill the void left by SVB.

The hybrid model: a new approach

Amadeo’s hybrid venture-credit model combines venture debt with mezzanine financing. This approach allows for shorter investment horizons (2-3 years) compared to traditional venture capital (5-7 years), and with similar return expectations.

“Mezzanine financing and debt financing options, including securitization via options, provide control over loan repayment and offer a more attractive proposition for startups and investors alike,” Lebedev said.

Similar investment firms use the DSE (Deposit, Account, Control) system, which facilitates automatic loan repayments by debiting money from a company's account upon receipt. While this system is relatively new to the U.S., similar mechanisms have long been in use globally, says Lebedev.

He compares the U.S. venture financing environment with Europe’s. “Advanced payment systems and financial discipline offer unique advantages to investors,” he said.

“In the U.S., credit ratings and reputational risks play a significant role in business development, making the hybrid venture-credit model more appealing as it provides a structured approach to funding.”

The evolution of venture financing

Lebedev believes that hybrid venture-credit model is the future of startup investment. “This model effectively addresses the need for flexible funding and rapid business expansion, without significant equity dilution for founders,” he said.

As technology advances and AI-driven financial analysis becomes more prevalent, funds that adopt these innovative practices gain a competitive edge.

SVB’s collapse precipitated a wave of innovation and new entrants into the venture debt space. New players are often more agile and better equipped to understand the unique needs of startups, providing customized solutions that can offer even greater value.

“Amadeo’s hybrid venture-credit model offers a compelling alternative to traditional venture capital, providing flexible and growth-oriented funding solutions,” Lebedev added.

This innovative approach has the potential to steer the evolution of venture financing, more effectively catering to the needs of startups and small businesses in a tough economic environment.