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Venture Fundraising for Startups in a Post-COVID-19 World

While you might assume that the COVID-19 pandemic would curb venture fundraising for startups, the opposite is true: according to the PitchBook-NVCA Venture Monitor from Q4 2020, VC fundraising netted a record $73.6 billion in 2020, and early-stage financings, which made up 65.7% of 2020 deal value, exceeded $25 million. We also saw record highs for deal count and value for mega deals for large, late-stage companies. As data from Q1 2021 rolls in, it’s clear that the trends continue apace.

But it wasn’t just venture capital deals that saw positive numbers in 2020: debt funding for startups also found its foothold and venture debt is quickly becoming a go-to tool for funding startup growth.

Venture Fundraising Boardroom Table Meeting

VC Isn’t the Best Fit for Everyone

Startups normally turn to VCs because commercial banks don’t tend to want to lend to early-stage companies. Early-stage startups may not have sufficient assets to secure a loan, and without cash flow probability, they’re more of a risk to lenders.

Even startups that have received rounds of funding, and have access to raise additional equity, might be in place in their company lifecycle where bringing in new equity financing might not be ideal. Raising additional equity capital to hit near term product or growth milestones, and in the process taking on more funding at this point at a reduced valuation isn’t always optimal. More startups are tactically addressing funding strategies to include alternative fundraising sources including venture loans.

What’s the Future of Fundraising?

So what’s next? Some industries may find it easier to get funded than others. In fact, biotech and pharma companies received more than $3 billion in loans in 2020. Software-as-a-Service (Saas) companies have also seen significant expansion in funding options with plentiful offers from royalty and revenue based funding lenders to venture debt funds and business development companies all focused on providing alternative tech lending solutions.

We should see startups continue to consider alternative capital funding strategies. In 2020, venture-backed companies used debt products on close to 3,000 different occasions (some in tandem with equity fundraisers) including term loans, credit lines, equipment financings, convertible notes, and more.

Where Venture Debt Comes In

Venture debt is high on that list of alternative capital funding strategies. It lands right in the middle of VC funding and commercial debt. It’s not a replacement for equity, but it doesn’t dilute valuation the way equity does.

Who is venture debt good for? It’s an ideal solution when a startup is deliberately spending ahead of revenues with a plan for growth, and raising additional capital in the form of venture debt can help the company reach a new valuation plateau as financial and business milestones are achieved. The best part? Founders don’t give up control of the company like they do with venture capital.

COVID-19 may have given all of us the opportunity to rethink how we do business, but it hasn’t slowed down many startups. If anything, it has opened the door to alternatives to venture capital, freeing up startups to choose the funding option that best fits their needs.

Posted on Thursday, April 29, 2021