A sizeable number of US lenders are reporting a spike in loan activity to startups in 2016, including Silicon Valley Bank, Wellington Financial, and TriplePoint, signaling that more startups are choosing debt over venture funding. As Persado CEO Alex Vratskides told Bloomberg, “interest rates are low, and you avoid dilution. It’s a no-brainer.”
According to a recent Bloomberg article, more US startups have been taking on debt as venture funding slowed down in 2016 and deals became more stringent. More startups became concerned about diluting their shares as these deals required more equity for less money. Raising equity already carries the risk of selling shares at lower prices during valuation negotiations, known in the industry as down rounds or flat rounds.
The result is not unlike the debt boom of 2008, when venture funding slowed down severely and startups switched to debt to raise money without diluting their shares. Yet even without a slowdown in venture funding, lending is hardly new. Several venture funds offer credit lines to their startups to help them cover extra operating costs and smoothen their cash flow.
Lending of course comes with its own risks. Tech blog GigaOm and game console maker Ouya were both forced to shut down and sell the company after failing to pay off their debt. These loans are much stricter because unlike the venture funding model, which is designed to accommodate higher risk, lenders require more steady and less risky payments. The startups that go for debt are usually more mature and willing to take the risk if the terms are well structured.
Read the original article here.
Contributed by Maha AbdelAzim.