2024 marked a record-breaking year for U.S. venture debt deals, which reached $53.3 billion in investments. According to PitchBook’s NVCA Venture Monitor, the dramatic increase in venture debt funding—up 94% from 2023—was driven by evolving venture capital (VC) dynamics.
With big AI growth funding rounds absorbing record amounts of capital, ordinary B2B startups have been starved for VC. Those that do garner interest from VCs have to carefully evaluate investor growth expectations and whether they can keep pace before accepting a deal.
What’s driving the surge in venture debt?
Decline in VC funding: The reduction in VC investments has prompted more startups to seek alternative financing options.
Cost of equity financing: The rising cost of equity has made venture debt a more attractive option for startups looking to minimize dilution and maintain control.
Large, late-stage debt deals: There has been a notable increase in substantial debt agreements among late-stage startups that have turned to venture debt as a lower-cost substitute for additional equity financing; startups also use venture debt to extend runway and avoid down rounds.
Increased availability from lenders: As venture debt proves to be a lucrative and lower-risk financing method for lenders, more financial institutions and non-bank lenders are entering the space, increasing available capital.
Why Do Startups Choose Venture Debt?
With funding amounts reaching nearly $30 million, venture debt can significantly extend runway at a fraction of the cost of equity, preserving shareholder value and enabling the company to achieve key milestones prior to an equity round raise. This helps founders navigate difficult funding environments, avoid down rounds, increase leverage for future funding, and achieve higher valuations.
While the rise in venture debt presents more opportunities for founders, it also requires careful financial planning. Startups have to evaluate their ability to meet repayment terms while using debt strategically to fuel growth.
Is Venture Debt Right for Your Startup?
Unlike equity, debt must be repaid, so startup leaders need to understand the impact of repayments on cash flow and ensure the business has a clear path to profitability or future funding.
Revenue Model
Startups with recurring sales, such as Software-as-as service (SaaS) and other subscription-based tech businesses have more predictable revenue streams compared to those operating off one-time sales, and are therefore strong candidates for venture debt. Because these businesses scale easily by nature, they’re likely to generate higher cash flows over time. Traditional banks may not like to lend to these types of companies, which take longer to reach profitability and have few hard assets, but venture debt providers do.
Right-Sizing Funding
As a company’s debt grows, so does the cost of servicing the debt. Debt service includes interest expense, other loan fees and the principal. Though debt costs significantly less than equity, companies and founders potentially get the most value from lower levels of debt when the business is still burning cash and other liquidity resources are tight. Often, the best strategy is to raise follow-on debt rounds as revenue grows, right-sizing venture debt to changing cash needs and business goals.
Get Non-Dilutive Debt Capital to Grow Your Startup
Lighter Capital provides loans at 3 to 4X monthly recurring revenue (MRR) for early stage SaaS businesses and up to 6X MRR for later stage companies. We offer additional tranches as revenue increases, up to a total of $4 million. We also won’t ask for personal guarantees, financial covenants, warrants, or equity. Apply online to find out how much you could qualify for.
Use Cases for Venture Debt
Debt is best used for driving meaningful growth in the business—without a return on the debt investment, a startup will quickly run into cash flow and liquidity problems. It’s even more important to realize revenue gains before the end of the loan term.
Early-stage startups typically see the greatest impact from debt when it’s used at an inflection point. For example:
You have a high-performing marketing channel and you want to invest more in it.
Your pipeline is gushing — you needed to hire a sales team yesterday.
You closed your largest contract to date and need a bigger team that can effectively service the account.
You have several loyal customers begging for a new feature and you need to hire developer resources to meet the market need.
A small injection of debt capital can enable the business to jump on an immediate opportunity that will improve metrics and get the business to its next milestone faster, without any equity dilution.
Qualifying for Debt
Getting approved for venture debt is different from raising VC—capital providers will scrutinize fundamental financial levers. Lenders will want to see a healthy, sustainable business that isn’t about to go belly-up. Be prepared to demonstrate revenue consistency, manageable cash burn, and other business metrics that indicate your business can scale successfully.
Learn more about debt financing for startups
Financing Your Startup Using Debt is one of our most popular founder resources! Get the guide that can help you make smarter fundraising choices for your startup. See how to compare different types of startup loans, then work through specific financing examples to understand the real costs with this comprehensive guide.