International Venture debt funds investing in Spain
In this article we are going to highlight the key points of the last webinar on venture debt funds investing in Spain which had the participation of:
- Fatou Diagne, from Bootstrap Europe
- Antony Baker, from Claret Capital Partners
- Sergio Pérez, from Sabadell Venture Capital
Important aspects of the webinar
Investment profile of international investors
International investors in venture debt focus on providing loans to startups across Europe, particularly targeting B2B companies at the Series A stage or later. This financing option allows companies to delay equity rounds, thus minimizing dilution and potentially increasing valuations as they reach key milestones. It’s particularly beneficial for companies with a strong grasp of their unit economics and a clear revenue generation strategy, often found in sectors like deep tech, climate tech, fintech, and life sciences.
Venture debt complements venture capital, with its viability increasing as companies progress through their growth stages. While venture capital may be more prevalent in the early stages of market fit, venture debt becomes viable at later stages, usually around Series A or Series B rounds. The terms and conditions of venture debt are customized to meet the company’s growth stage and financial requirements, often supporting initiatives like purchasing manufacturing equipment. However, venture debt may not be the best option for financing loan books due to its higher cost compared to equity financing. In such cases, specialized finance or certain banks may offer more suitable alternatives.
How is the contRact in Venture debt funds?
The contract for venture debt financing is typically divided into two main sections: the loan terms and the covenants or guarantees provided by the borrower. Since startups often lack traditional collateral, the focus is on ensuring repayment rather than securing tangible assets.
Covenants and guarantees are included to mitigate risk and ensure the lender’s interests are protected in case of default or acquisition. While these provisions may not offer tangible collateral, they prioritize debt repayment over equity in certain scenarios.
Despite being legally binding, venture debt contracts are generally simpler compared to other financial agreements. Key elements include pricing, equity kicker terms, collateral requirements, and other pertinent details.
The main goal of venture debt funding is to recover the loan amount with interest, but the inclusion of an equity kicker adds an extra layer of protection. This allows lenders to potentially benefit from the success of funded companies, offsetting losses from defaults and maintaining the overall health of the lender’s portfolio.
Differences between Spanish and international venture debt providers
- There’s variance in deal structures and pricing among providers, both within and across geographic regions.
- International funds tend to offer larger ticket sizes and have broader relationships with VCs, growth equity firms, and entrepreneurs.
- Spanish players are more embedded locally and have deeper relationships on the ground.
- Pricing, particularly in terms of interest rates and warrant coverage, varies between international and Spanish lenders.
- Spanish lenders may be willing to fund riskier ventures, potentially justifying higher warrant coverage.
- Co-investments between international and Spanish lenders can offer the best of both worlds, combining local knowledge and international structuring capabilities.
- Spanish players may focus more on Series B and beyond, taking on more risk for potentially higher returns at a more mature stage.
- Despite these differences, the overall view and approach to venture debt are generally similar between Spanish and international players.
Opportunities in the Spanish ecosystem from Venture debt funds
- Spain’s venture debt ecosystem has developed significantly, with several players emerging in recent years, although it’s still considered an early market.
- There’s a noticeable gap between venture capital and venture debt in Spain, which may be larger in proportion compared to other countries like the UK, France, or Germany.
- Sergio believes that Spain is relatively mature in the venture debt space compared to other European countries, with numerous players already established.
- Anthony and Fatou acknowledge the growth of venture debt activity in Spain, particularly at the seed stage, which is more competitive than in other territories.
- Sergio suggests that the opportunities for venture debt funds may lie in expanding into later-stage financing, although they already compete and collaborate extensively within the existing market.
- While Sergio’s institution focuses solely on Spain and Portugal, he sees potential opportunities to expand into other markets, such as Germany, where there may be gaps in venture debt provision.
- However, expanding into certain markets like Portugal or Italy may face challenges due to the availability of public funds, legal issues, or market conditions.
- Anthony and Fatou emphasize that their focus and expertise lie more in later-stage investments, typically with companies generating at least four to five million in revenues, which may not align with the earlier stage seed companies prevalent in Spain’s venture debt market.
Venture debt funds in 2024
In 2024, there is a notable sense of optimism among entrepreneurs and investors in the venture debt space, especially after the challenges faced in the previous year. The availability of capital and venture debt opportunities has increased, driven by a desire among venture capital funds to deploy their funds and satisfy their limited partners. Despite past hardships, many companies have emerged stronger, more profitable, and adept at leveraging technology, particularly AI, to accelerate growth and enhance their products.
This resilience has led to a resurgence of optimism among venture capitalists, with signs of exits opening up again. However, there are concerns about the fundraising environment for venture capital funds, especially for first-time managers or those with weaker track records. In contrast, venture debt funds may have an advantage in convincing limited partners due to their stable returns and quicker capital deployment. Overall, there is recognition of the benefits of having a diversified portfolio that includes both venture capital and venture debt investments.
Check out the complete webinar
