TLDR:
- European venture capital-backed companies are turning to complex convertible debt deals as traditional equity funding dries up.
- The volume of convertible debt issued hit a record $2.5 billion in 2023, up from $1.7 billion in 2022.
European start-ups are facing a funding crunch as traditional venture capital funding has slowed sharply, leading them to seek alternative sources of financing. As a result, many companies are turning to increasingly complex convertible debt deals, which offer quick cash without the need to establish a new valuation through equity rounds. The volume of convertible debt issued by European venture capital-backed firms reached a record $2.5 billion in 2023, signaling a growing trend in the start-up ecosystem.
While convertibles can provide a lifeline for companies in need of cash, they also come with risks. These deals can give investors more control and larger payouts down the road, potentially leading to loss of control for company founders. With the power shifting towards investors in the current market conditions, deals are becoming more structured and complex, favoring investors with terms that secure their interests.
Despite the challenges, some companies see convertibles as a viable option to secure funding while waiting for market conditions to improve. Some companies, like Norwegian lithium-ion battery business Morrow, have successfully raised convertible debt to navigate the challenging capital markets. However, experts caution that delaying revaluations may not be a sustainable strategy, as the truth about a company’s valuation will eventually come out.
While there is optimism that equity fundraising will recover when market conditions improve, the use of convertibles in today’s market reflects the challenges faced by start-ups in securing traditional funding. As companies navigate the funding landscape, the risks and rewards of complex debt deals will continue to shape the European start-up ecosystem.
