TLDR:
- European start-ups are turning to complex convertible debt deals as venture funding dries up.
- The volume of convertible debt issued hit a record $2.5 billion in 2023.
European venture capital-backed companies are increasingly utilizing complex convertible debt deals to raise cash quickly and privately, without publishing updated valuations. As the venture funding landscape becomes more challenging, companies and investors are turning to convertible debt, which converts into equity after a set period, to secure alternative longer-term funding. The complexity of these deals is on the rise, offering investors more upside while creating risks for the companies involved.
The increase in structured debt deals is shifting power towards investors, with terms favoring them in case management fails to meet certain targets. The hardest-hit market is in Europe, where venture fundraising has significantly slowed down, leaving some early-stage firms in a funding crunch. Financial challenges have led companies to explore convertibles as a way to bridge the gap until equity fundraising conditions improve.
While not all firms using debt are struggling or avoiding revaluations, the industry participants warn that delaying revaluations may not be a sustainable strategy. European start-ups are hoping for a market improvement in the future, but the current financial landscape remains uncertain. As the trend towards complex debt deals continues, it remains to be seen how companies will navigate these challenging times.
