By: Matt Holtz | Senior Director

Venture debt deals bottomed out in 2023, plummeting by more than 65% of the deal volume in 2022. This year, however, emerging technologies and changing needs across the startup landscape will fuel recovery.

Venture debt is a financing tool used by early-stage and growth-stage companies, particularly those that have not yet reached profitability. Unlike equity, venture debt must be repaid regardless of a company’s success. Since 2023 was a tough year for technology companies and startups, it makes sense that venture debt deal volume suffered.

According to Matt Holtz of Embarc Advisors, here are six key predictions for what’s to come in 2024.

#1. A Rebound in Fundraising Will Increase Interest

In 2023, venture debt interest steadily declined. However, there have been a few bright spots to begin the new year. Cabify, a multi-mobility platform that is reinventing rideshares and last-mile logistics, secured $15M in venture debt from BBVA Spark to accelerate its growth in sustainable urban mobility, signaling recovery.

A resurgence in fundraising activities within the startup ecosystem will spark increased interest in venture debt deals. As more startups secure capital, they will seek ways to extend their runway and drive growth without diluting equity, making venture debt an attractive financing option.

#2. Non-Bank Lenders Will Gain Ground

Last year, we saw the fall of one of the largest banks in the startup ecosystem, and that caused a lot of uncertainty for funding. As the dust has settled, new options are quickly emerging to fill the need. Venture debt funds and nontraditional lenders are pursuing more deals.

For example, Blackrock, the world’s largest asset manager, has recently entered the venture debt market with the acquisition of European venture debt lender Kreos. The flexibility and willingness of these non-bank lenders to accommodate startups’ unique needs will enable them to increase their overall market share relative to traditional banks.

#3. Venture Debt Will Facilitate Early-Stage M&A

Early-stage companies often face an uphill battle in funding acquisition-led growth strategies. Valuation discrepancies, deal complexities, and limited financing options create tough conditions for funding early-stage mergers and acquisitions.

In 2024, venture debt will increasingly serve as a strategic tool to facilitate early-stage mergers and acquisitions. Startups looking to expand their market presence or leverage opportunities to acquire underperforming or underfunded assets may have the opportunity to do so through venture debt.

#4. High-Growth Industries Will Lead the Pack

As with any trend, opportunities are not distributed equally. Certain industries, like generative AI, biotech, software-as-a-service (SaaS), and other high-growth sectors will disproportionately claim the lion’s share of venture debt deals.

These industries often require substantial capital for research, development, and scaling, making venture debt an attractive financing solution. For example, Quora recently closed a $75M fundraising from a16z to grow its AI chat platform.

#5. Geographic Diversification of Venture Debt Deals

Venture debt deals are common in California and New York. But increasingly, more deals are taking place beyond these traditional geographic boundaries. Cities like Boston, Miami, Austin, and Seattle will account for a greater share of venture debt activity compared to previous years.

The Southern United States has seen the most significant change in venture debt funding, now totaling up to 20% of all venture capital deals — a 10% point increase since 2018. As the startup ecosystem continues to expand beyond Silicon Valley and the East Coast, venture debt providers will follow suit.

#6. Average Deal Size Will Trend Up

Venture debt deal sizes are expected to outpace 2023 levels but will remain well below the market peak. This trend will be driven by stabilizing interest rates, and startups raising smaller funding rounds, as we witnessed in 2023, with Series B median funding rounds down ~40% vs. 2021 ($30M vs. $17.8M).

While still prioritizing growth, the renewed emphasis on profitability at earlier stages will reward companies focusing on efficient capital deployment, and those opting for more targeted financing, rather than traditional debt offerings.

Venture Debt is Rebounding

In 2023, venture debt funding fell by 65% compared to 2022. According to Deloitte, rising interest rates and the collapse of several traditional banks along with other macroeconomic headwinds like inflation and general uncertainty in capital markets shrank venture debt funding to $12B in 2023.

With interest rates stabilizing, venture debt is poised for a comeback. The market is evolving to meet the changing needs of startups and emerging industries. The dynamic nature of the startup ecosystem will fuel a resurgence in venture debt funding for 2024 that will help recover last year’s losses but is not projected to surpass previous performance in 2022.

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