Venture Debt a Maturing Market in VC

Loans to startups have grown faster than broader VC industry
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Key takeaways

Research•

Growing at a faster pace than the broader VC market, debt has become
a common alternative to equity for companies looking for cheaper
financing. Over the past three years, more than $80 billion in loans andother debt products have been originated for VC-backed companies.
In 2019, the debt market attained a record value at $28.2 billion acrossmore than 3,000 occurrences. 2020 nearly matched that level, and webelieve venture debt will continue to grow over the next few years.

•

Tech companies account for the largest proportion of debt issuances to
VC-backed startups. The low capital expenditures for many tech startups,
coupled with recurring revenue-based business models, make loans agood fit for portions of their growth plan. Although a limited revenue
track record can make lending to a young startup risky, often it is theequity investors that help secure the loan, reassuring the lender that
future equity rounds will repay the loan if the company’s revenues can’t.

•

Biotech & pharma companies received more than $3 billion in loans
during 2020, far and away the highest level this sector has seen in ourdataset. The unique characteristics of these companies (capital intensive
and little-to-no product revenues for years) can make debt a risky
endeavor. We see in the data, however, that these companies tend to exit
more quickly than their tech counterparts (IPOs average just over five
years), adding a debt repayment outlet if they are successful.

K YLE STANFORD, CAIA Analyst, VC
kyle.stanford@pitchbook.com
reports@pitchbook.com

Data
ALEX WARFEL Data Analyst

DesignJULIA MIDKIFF

Contents
Key takeaways

1

Introduction

2

Growth of venture debt market

2-4

Growth of venture debt by stage

4-8

Growth of venture debt bysector9-11

Venture debt moving forward

11-12

Published on March 22, 2021
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PitchBook Analyst Note: Venture Debt a Maturing Market in VC

2Introduction
Over the past decade, venture debt has emerged as a major alternative
source of financing for high-growth startups that have traditionally opted
to solely finance through equity venture capital. More than $20 billion has
been loaned to VC-backed companies in the US during each of the past
three years, and the number of debt financings for VC-backed companies
has grown at a higher rate than the VC market overall. This growth has seen
debt enter every part of the market, reaching every sector and, mostinterestingly, every stage.
Venture debt remains a lesser-known alternative to equity financing of VC.
Taking on debt can be a hazard for young startups without steady cash
flows, and missed payments and defaults can lead to a company’s downfall.
Taking on debt may signal risk to potential investors, who may wonder whatcaused the need for extra capital or whether current investors aren’t fully
on board with the company’s mission and are therefore unwilling to
reinvest. While debt financing risk remains, signaling risks have lessened
over the past few years as the benefits of debt as a non-dilutive source ofgrowth or working capital have begun to outweigh the negative
perceptions and risks of the past.
We believe venture debt will continue to grow over the next few years,
capitalizing on the entrance of new lenders, the continued low-interest-rateenvironment, and our projection that the strength of the US venture market
will endure.

It should be noted that
venture debt is not always
used strictly as an alternative
to equity financing. Rather,venture debt is often usedin conjunction with equity
financing to provide a young
company with additional
working and/or growth
capital, and often for varying
reasons.

Growth of the venture debt market
In 2020, venture-backed companies used debt products on nearly 3,000
different occasions, including in tandem with equity fund raises. Theseloans included term loans, credit lines, equipment financings, convertible
notes, and more—and the many types of debt can be used by companies inan equally variable number of ways. Venture debt is meant for growth in a
general sense, and it can be taken on as cash-flow insurance in the nearterm, as a source of short-term working capital, or as a means to finance
growth projects for the company.
In the past several years, the options of debt products for emerging growthcompanies have expanded as well. Business credit cards specificallytargeted at VC-backed startups have emerged, companies such as Squareand Stripe have launched small-business banking and capital solutions, andlenders have developed revenue-based financing options that can lessen
the burden of repayments in the case of unstable revenues. Companies cancustomize their borrowing to maximize their return on the borrowed cash
and negotiate flexible terms to protect their business.

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

3

Venture debt deal activity

$30

3,500

$25

3,000
2,500

$20

2,000

$15

1,500

$10

1,000

Debt value ($B)

2020

2019

2018

2017

2016

2015

2014

2013

0

2012

$0

2011

500

2010

$5

Debt countSource: PitchBook | Geography: US*As of December 31, 2020

Equity financing is one of the most expensive forms of VC capital for acompany. Debt, on the other hand, can be cheap. For startups experiencing
growth, selling a 10% stake to investors for $200,000 can cost millions
when a company exits. Equity investors expect their capital will result in acompany that has grown multitudes larger over the time of their investment.
This is, of course, how the venture industry works, and the high potential
returns are there to entice investors to pursue the high-risk strategy offunding companies that are likely to go out of business. Ultimately, however,
the repayment of equity investments comes at the expense of founders andother investors whose shares have been diluted.

According to PitchBook’s
methodology, debt
financings—including
convertible notes, termloans, revenue-based loans,and equipment financings,
among others—provided
to companies that are VCbacked at the time of theround are included in venture
debt. When investment
rounds are a hybrid ofdebt and equity, if possible,
the equity portion will be
extracted when calculating
venture debt values.

While equity is a claim on the future value of the company, venture debt isonly a claim on future cash flows until the debt is paid off. Introducing debt
in a capital stack can lessen the dilution of stake holders’ shares; however, it
is not designed to take the place of equity financing entirely. Loans are
generally combined with equity financing to increase the capital available
to the startup for growth and to leverage the investment for the equity
sponsors. Lines of credit, for instance, can be used to ensure a company
has enough capital to realize its growth projections for the next fundraisingmilestone. In this case, an emergency round of equity financing, even at thecompany’s previous valuation, would dilute the investor base, adding
significantly to the overall cost of the capital.
The growth of venture debt has largely coincided with the growth of private
markets overall. US VC deal counts have grown from around 5,500 deals in2010 to 12,250 in 2020 (2.22x). US private equity deal counts expandedfrom 2,760 in 2010 to 5,300 last year (1.92x). Venture debt has increased
faster than both, more than tripling during the same timeframe from 940
loans in 2010 to 2,900 in 2020 (3.10x). It makes sense that the growth ofventure debt has outpaced the broader VC market. More companies
receiving institutional venture backing equals more potential borrowers for
lenders, in many ways making venture debt a dependent variable, at leastin terms of our methodology. There are firms that lend to startup
companies that lack institutional backing, although these investments do
not fall within our definition of venture debt.

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

4

As has been the case with the broader venture market, the growth in loan
value for venture debt has been driven by large deals. In 2020, just 37 loans
accounted for nearly $17 billion in venture debt value, roughly 60.5% of the2020 market total. These included WeWork’s emergency funding from
SoftBank as well as loans extended to now-public companies Bumble and
DoorDash, among others. It would be easy to discount these rounds fromventure debt statistics because the capital may not have been used simply
for “growth,” but they highlight the varied uses of debt for VC-backed
companies as well as the sizes of loans available to top companies.

Growth of venture debt by stage
The venture loans that receive the most attention are the large, late-stageloans and pre-IPO instruments, as is the case with their large, late-stage
equity counterparts. Before completing its IPO in 2019, Uber raised morethan $4 billion across several instruments; Airbnb’s $1.0 billion loan fromSilver Lake Partners in April garnered considerable attention, not just for its
size, but for the post-IPO windfall Silver Lake received from the attachedwarrants. However, venture debt has been split relatively evenly between
early- and late-stage companies for the past decade, at least in terms offinancing count. Recently, even seed-stage loans have caught up, largely
because of the increased use of convertible notes for these investments.
The uses for debt at different stages of the venture lifecycle are distinct,
and the risks posed for companies at different stages of growth drive
differences in the loans they are offered.
Venture debt deals (#) by stage

Venture debt deals ($M) by stage

1,200

$20

1,000

$15

800
600

$10

400
$5

200
0

Angel & seed

Early VC

Late VC

Source: PitchBook | Geography: US*As of December 31, 2020

Angel & seed

Early VC

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

$0

Late VC

Source: PitchBook | Geography: US*As of December 31, 2020

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

5

Late-stage companies
Late-stage equity investments are inherently less risky than early stage orseed investments; likewise, late-stage debt financings carry less risk ofdefault from the company going out of business, and interest rates at thelate stage reflect this difference from early-stage companies. Large banks
and public business development companies (BDCs) are active in the laterstages of the market because of their ability to assess risk on more robust
revenue data for each company, whereas earlier debt investments are
dominated by debt funds and specialized banks. For banks and BDCs, theopportunity to work with late-stage borrowers can be very tempting,especially for companies about to go public. Although private equity firms(Silver Lake Partners and Sixth Street Partners) participated in the loan, the2020 debt and equity investment in Airbnb procured an especially highreturn for the lenders, who took warrants that amounted to a sizeableownership stake in Airbnb as part of the $1.0 billion financing, resulting in anear $500 million windfall when the IPO was completed—and thecompany’s share price then doubled on the opening trade.
From 2009 through 2020, late-stage venture loans grew more than 2.5x
and exploded over that time by nearly $17 billion in annual value. As
mentioned above, the surge in loan amounts over the past few years has
been heavily boosted by large, late-stage companies raising outsizedrounds. In fact, loans of $100 million or larger have become much morecommon in the past few years. Since 2018, 66 loans of this size have beentaken on by late-stage companies. Between 2006 and 2018, just 57 loans
had been received by late-stage VC-backed companies.
Venture loans ($M) to late-stage VC-backed companies by quartile

$25
$20
$15
$10
$5

Average75th percentile

Median

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

$0

25th percentile
Source: PitchBook | Geography: US*As of December 31, 2020

In 2020, the median venture loan was just $2.9 million, well under the
median $10.0 million size of late-stage venture deals. The growth in the
median loan size has roughly matched that of the overall late-stage venture
financings, however, growing by nearly 50% in the past 10 years, evenhitting $4.0 million (100% growth) at the decade’s high-water mark in 2018.
In comparison, the median late-stage VC deal has grown from $6.0 million
in 2010 to $10.0 million in 2020 (66.6%).

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

6

The late stage has expanded considerably over the past decade ascompanies have prolonged their private development and have enteredpublic markets more highly valued than were companies in the past. Not
only are there now more late-stage companies looking for capital, but ingeneral these companies are driving higher revenues that will help them
maintain their loan service payback schedule. One of the past arguments
against startups taking on debt was that uneven revenue streams andwider gaps between good and bad months could leave a young company
without the ability to make its monthly payments. Defaulting on a loan
could trigger losses that go beyond extra fees charged, as a large portionof venture loans are backed by the company’s intellectual property. Equity
investments aren’t meant to be kept on the balance sheet to pay loans; they
are supposed to be used for growth programs, freeing revenues to service
debt. The ability to use robust past revenue metrics protects against
downside risk for the lender as well, even beyond the senior secured
position that many of these lenders will take.
Early-stage companies
Early-stage companies (generally Series A- and Series B-funded
companies) have been major targets of venture debt for some time, as
the financing type helps lengthen capital runway so companies can reach
growth targets before another equity raise. In 2020, just under 800
early-stage debt financings occurred in the US, a year-over-year decline—
although, due to the lag between the announcement and collection ofprivate deals, we expect this figure to increase.
Loan value for early-stage venture debt has increased from an average
yearly value of $1.4 billion from 2006 through 2013 to a high-water-markof $11.5 billion in 2019—and 2020’s figure reached $7.1 billion. This top-line
growth hasn’t necessarily been due to an increase in the core of early-stage
venture lending. The median early-stage loan was just $1.5 million in 2020,
and while that is double the size of the median a decade ago, the spread
between the average and median loan sizes has widened significantly inrecent years.
Early-stage venture debt rounds ($M) by quartile

Average75th percentile

Median

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

$16
$14
$12
$10
$8
$6
$4
$2
$0

25th percentile
Source: PitchBook | Geography: US*As of December 31, 2020

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

7

Large deals in relatively young companies and capital-intensive industries
have driven this widening spread. Over the past three years, ninecompanies have raised debt rounds of $500 million or more. Seven of those
operate fintech-based businesses, with several offering credit productsof their own in which huge amounts of capital are needed to deploy theirbusiness models.
Such capital-intensive business models are not typical for tech startups, but
the ability to raise the amount of capital needed to deploy such a strategy
enables these smaller companies to compete with large incumbents inmore traditional markets such as banking and home buying. While it may
have been possible for these companies to raise sufficient capital throughequity alone, doing so would have either put a wildly high valuation on thecompany, caused extreme dilution for the founder and other investors, orboth. The cost of capital also comes into play here as well. Bolstering abalance sheet to implement a business model (rather than invest in lossmaking business growth) makes the use of debt a much more efficient formof financing. In these instances, venture debt bridged the gap and enabled
the companies to develop their business models at a large enough scale tobe viable.
Early-stage venture lending leans more heavily on the lender-investor
partnership than late-stage loans because of the relatively shorter financial
history of the companies. Existing equity investors try to mitigate thehigher risk to lenders inherent in early-stage loans by not only vouchingfor the company’s growth prospect but by ensuring the lender thatfurther equity raises are a likely event. Beyond helping the company withfurther growth, effectively collateralizing the loan helps maintain a strong
relationship with the lender, which is good practice because while themarket is growing, the number of active lenders is relatively low. Letting aborrowing company default on a loan would likely ruin the lender-investor
relationship and make it more difficult for the investor’s other portfolio
companies to borrow from the same lender.
Angel-backed and seed-stage companies
Convertible notes are common for the angel and seed investments instartups. For such young companies, pricing a round and agreeing on
a valuation are difficult because the business may still be an idea indevelopment. Most startups do not have a long track record of growthor financial metrics to project their future growth and market traction. In
these cases, a convertible note helps by providing the company with cash
it needs while it protects the investor from mispricing the current round or
simply allows more knowledgeable investors to price a future investment.
Convertible notes are not included in many lenders’ definitions of venture
debt, but because they are a debt product, we have included them as partof our venture-backed debt dataset.

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

8

Angel/seed venture debt rounds ($M) by quartile

$1.4
$1.2
$1.0
$0.8
$0.6
$0.4
$0.2

Average75th percentile

Median

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

$0

25th percentile
Source: PitchBook | Geography: US*As of December 31, 2020

As noted, convertible debt is a relatively easy way for companies startingout to raise capital without the need to haggle with investors over valuation.
These securities became even more accessible when Y Combinator and 500
Startups published simple, easy-to-use forms to help angels and founders
expedite the process of getting capital where it is needed. Simple
Agreement for Future Equity (SAFE) and Keep It Simple Security (KISS),
respectively, are the companies’ branded forms of convertible securities.
They lay out the foundation for quick-and-easy funding rounds that pushformal valuation of the company to a later date.
Convertible notes aren’t the only way debt is leveraged in angel- andseed-backed companies, however. There are lenders that venture this earlyin the VC lifecycle, but the risks entail certain downside protections to help
cover losses.

Small Business
Administration loans are
possibilities for such young
companies, but these loansaren’t made to companies
with institutional backing andare not included in our VC
dataset.

Over the past decade, the seed stage has moved later in the venture
lifecycle; the median age of companies raising seed has moved from 1.5
years to 3 years in the past decade. While many companies will still lacksufficient financial metrics for a thorough risk assessment, there are a
growing number of opportunities for lenders to participate in the stage.
More than 400 seed-funded companies have received financing throughdebt during each of the past three years—roughly 15% of the seed-stage
venture financings—and, until last year, debt financings to seed-stage
companies had risen each year since 2008. Although it breaks all the rules
for traditional lending, most seed-stage loans are secured by the
relationship between the lender and the investors in the company. In lieu ofrevenue-based payback, loans may be secured through the investors, which
implies that another round of equity will be raised to pay off the loan.
For downside protections, loans to such young companies would likely
include warrants or a claim on the company’s intellectual property—or
both—as collateral. As senior-secured lenders, they are assured the debt
will be satisfied if there is a liquidation event.

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

9Growth of venture debt by sector
Tech
Tech and tech-enabled businesses are major targets for venture lending.
Tech has become nearly synonymous with venture over the past decade.
Similarly, tech companies account for a large majority of venture loans.
During 2020, 2,203 (75.4%) of the venture debt offerings went to techcompanies, representing nearly $18 billion (64.7%) in credit services.
Beyond simply being omnipresent in venture, tech has delivered businessmodels that work well with fixed-return products and provide lenders withmetrics that fit into credit models to help with loan diligence.
Tech venture debt activity

0

Deal value ($B)

2020

$0

2019

500

2018

$5

2017

1,000

2016

$10

2015

1,500

2014

$15

2013

2,000

2012

$20

2011

2,500

2010

$25

Deal countSource: PitchBook | Geography: US*As of December 31, 2020

Software as a service (SaaS) has become a model used by many companies,
and if SaaS isn’t part of a company’s offering, it is likely using one or more
SaaS products within its corporate structure. What recurring-revenue
business models such as SaaS have done is make it easier to model future
revenues so lenders can reliably assess risk. Not only can a lender see
projected cash inflows, but it can also assess the capital needed to grow abusiness to a certain level and evaluate the impact the loan being offered
will have on the company’s underlying business growth. It should also be
noted that while startup businesses can have fluctuating revenues, evenwith recurring-revenue models, the intellectual property securing ventureloans can be valuable even if a company fails.
The tech sector has also led the venture industry’s growth in terms of deal
size and valuation; an ever-growing allocation to the venture strategy has
provided ample capital for aggressive growth economics. Debt has beenused to manage these valuations and the equity portion of growing deal
sizes. At the outset of the COVID-19 pandemic, many investors told
portfolio companies to cut costs and lengthen runway because of theuncertain economic outlook. For some companies, this included drawing
down lines of credit or entering into new loans, thereby pushing out thedilution an emergency equity raise would entail.

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

10

The past several years have proven that tech is more intertwined withbusiness and consumer habits than ever before. The continued adoption oftech will only spur further venture investment into the sector, likely also
increasing the adoption and use of venture debt among high-growthstartups.
Healthcare
Healthcare startups, more specifically biotech & pharma developers,
operate on a much different capital timeline than tech companies. Whereas
tech can be relatively cheap to operate, many healthcare companies
operate under long and expensive development timelines, with much moregovernment scrutiny and higher barriers to entry. This long-term timeline,
coupled with short-term capital needs, has created a unique financing needthat the VC industry is set up to provide.
Healthcare VC investment has grown significantly in the past few years, andinterest in the sector increased when the pandemic stalled the global
economy in 2020. Loans to VC-backed healthcare companies reached a
new high last year, tallying $6.7 billion across 765 loans. Although themarket for debt in healthcare is much smaller than the debt market for tech,
the value of loans extended to healthcare-focused companies haveincreased sixfold over the past decade, and the count of these financings
has more than doubled during that time.
Healthcare venture debt activity

$7

900
800
700
600
500
400
300
200
100
0

$6
$5
$4
$3
$2
$1

Deal value ($B)

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

$0

Deal countSource: PitchBook | Geography: US*As of December 31, 2020

Overall, venture lending to healthcare-focused companies has been moreor less evenly split between biotech & pharma, healthcare devices, andhealthcare services industries. In 2020, 285 loans were made to biotech &pharma firms, while devices companies received 263, and services firms 217.
Over the past couple of years, however, the proportion of loan value toeach sector has tipped further toward biotech & pharma, which received
more than $3 billion in venture debt in 2020. Never before had ventureloans to biotech & pharma companies surpassed $1.5 billion in a single year.
In fact, the $3 billion+ loaned in 2020 was more than 3 times the averageannual venture loan value of the previous five years ($910.0 million).

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

11

The unique characteristics of biotech & pharma companies can be well
suited for lenders who wish to participate in financing this sector. Biotech &pharma can be especially capital intensive, and companies can incur heavy
costs before revenues can be generated on a consistent basis. Because ofthis, loan paybacks rely heavily on future equity raises or completed exits,
such as an IPO or acquisition. A good example is Sana Biotechnologies. The
company recently completed an IPO at a valuation of $4.6 billion. It hadraised nearly $850 million in VC funding; had incurred as of September 30,
2020, a net deficit of $316.0 million since inception; and had generated zero
revenue from product sales. This is not uncommon for biotechs andhighlights the distinctive characteristics of biotech funding.
One such timing alignment can be during the crossover round or IPO
process. The need for large amounts of capital—if financed through equity—
can quickly dilute founder and investor stakes, although more importantly,
the possibility that a drug being developed may never make it to market
and generate revenues, even after a firm completes an IPO, increases therisk of financing a company solely with equity. These factors also makehealthcare venture debt risky. First and foremost, as these companies
frequently operate without generating product revenues, they may not beable to service the debt for quite some time. The differences between tech
venture lifecycles and those of biotech & pharma manifest in the vastdifferences in time to exit. Biotech & pharma companies complete IPOs on
a much faster timeline, averaging an IPO in just over five years. A quicker
time to exit provides a release valve for pressure building from the debt.
For example, Harmony Biosciences was founded in 2017 and went public in
August 2020. Before completing its IPO, the firm refinanced its debt with asingle, $200.0 million loan from OrbiMed Advisors, and stated that, in part,proceeds from the IPO would be used to service that debt through 2021.

Venture debt moving forward
The low interest rate environment in which the US has found itself for the
past decade has increased debt in nearly every market. Mortgage debt
grew by 7% in the US from 2019 to 2020, reaching a record $10.3 trillion.1
Institutions have piled into corporate debt, a market that surpassed $10.5
trillion in 2020, in search of yield. For the same reason, investors have also
found venture debt an attractive investment in recent years. Returns for theventure debt industry have been steady over the past decade, averaging
between an estimated 12%–15%, according to Applied Real Intelligence. 2 Ata time when 10-year US Treasury Bonds yield 1.29% on average, many otherfixed-income-linked investments such as venture debt become enticing.
When looking for market headwinds, interest rates are a likely target. While
the Fed has indicated that raising interest rates aren’t its current priority—
signaling that rates will likely stay low until at least 2023—frothiness in theeconomy could lead to calls for an increase in rates. We wouldn’t expect
minor changes to impact the venture debt market significantly, although it
is likely that large increases in rates would cause borrowers to pull backfrom loans due to debt service risks.
1: “Mortgage Debt Sees Record Growth Despite Pandemic,” Experian, Stefan Lembo Stolba,
February 15, 2021.
2: “Venture Debt: 10 Things to Know,” Applied Real Intelligence, ZackEllison, January 22, 2021.

PitchBook Analyst Note: Venture Debt a Maturing Market in VC

12

While we believe recent equity fundraising levels will perpetuate theventure market’s string of growth, a major factor that could affect theventure-lending market would be a downturn in the amount of capital
available for startups overall. Because we see the venture equity andlending markets moving somewhat in tandem, a strong decline in equity
financings would both lead to fewer borrowing companies and to a riskier
market for lenders. We do not believe a downturn in the equity market is on
the near horizon, however, barring any unforeseen global event. 2020
completed the highest year of fundraising in our dataset ($73.6 billion for
US-based VC firms), and over the past five years a total of $287.0 billion has
been raised by US equity investors.
In the current market, near-term risks for venture lenders are likely to be
more idiosyncratic in nature. Several closely timed write-offs on large loans
could have a major impact on a lender. However, venture lending has had
uncharacteristically low loss rates, so one would expect see lenders that
focus on such young businesses. A rise in losses from a venture lending arm
could see a parent bank pull back from loans to startups.
Despite this possibility, we believe the venture lending market is in astronger position than it has ever been. Not only is the venture capitalindustry continuing to grow and seeing increased allocation from investors
and limited partners, but there are an increasing number of lenders activein the startups loan market. The stigmas previously attached to debt foryoung companies have receded in recent years, providing another tailwind
for the market.