Claret raises €297m fund as European VC debt sets records
Queue up, VCs – you’re no longer the only choice for money-hungry founders in Europe.
As founders become more savvy about fundraising options, they are increasingly looking to raise debt as well as equity financing. And European debt funds are raising larger vehicles to satisfy their appetite.
Startups are on track to scale, according to Dealroom $20.4 billion of debt at risk in 2022, compared to $15.9 billion Last year. That would be almost three times the amount raised just two years ago – though it’s still only a fraction of total funding raised by startupswhich exceeded $100 billion in 2021.
Claret Capital’s 297 million euro fund
The latest European debt firm to announce a new fund to support tech companies in the region is Claret Capital. The London-based investor said today it has closed a third fund of €297 million for technology and life sciences companies.
“Total [venture debt] volumes have been growing both for our business and for the sector in general for the past 10 years. What has changed over the last few months is that in an era where equity is harder to raise than it used to be, debt is becoming quite an attractive alternative,” says David Bateman, Managing Partner of Claret.
“At a time when equity is more difficult to raise than before, debt is becoming a rather attractive alternative”
Claret typically takes out loans between €1 million and €50 million for a period of three to five years to venture capital-backed, revenue-generating (but loss-making) companies. The deals typically include some sort of upside discount, such as the option to buy company stock later, Bateman says.
Other European debt funds announced in the last 12 months include a 300 million euro fund from Revolut and Klarna backer GP Bullhound and an initial $200 million fund from London-based Atempo Growth, backed by Santander and the European Investment Bank, announced in January.
Different types of debt funds are also emerging; Avellinia Capital said earlier this year it had raised the first part of an initial fund of $150 million for debt underwritten against financial assets.
Specialist subprime debt providers have provided 27% of total loans to European technology companies from 2016 through April 2022, compared to 44% for banks and corporates, according to data compiled by GP Bullhound.
Venture Capital Debt vs. Venture Capital Funding
Venture capital debt can be an attractive complement to venture capital financing because, unlike venture capital, it does not require you to cede ownership of the business (although many debt funds have the option of take a slice later).
However, the debt comes with interest payments and may also include other conditions – some actions like too much foreign trade can trigger a fault.
Startups often use debt financing to finance acquisitions – in 2021, for example, many Amazon aggregators used debt financing to expand their brand portfolio.
Sonya Iovieno, head of venture capital and growth at Silicon Valley Bank UK, a leading debt provider, said: “The economic downturn also presents an opportunity for highly liquid companies, which are well placed to launch. in a wave of acquisitions.”
She adds that the bank has also seen “increasing demand from fintech companies for warehouse loanswhich finance their payment flows as well as for the provision of regulatory capital”.
“For companies starting in Series B, using debt rather than equity to fund their working capital has been an area where we’ve seen strong demand from founders, because it’s so cheaper and can grow with the business,” she says. Working capital refers to the cash a business can draw upon to meet day-to-day financial obligations.
Claret’s Bateman says its policy is that companies can spend the money they raise from Claret “on anything they would spend equity on.”
“We’re not telling the company they have to spend it on anything specific,” he says.
However, not all startups that want to raise venture capital debt will be able to. Given rising inflation and “geopolitical volatility”, GP Bullhound written earlier this year that he expects “lenders to become more selective about business models” and prioritize “borrowers in less cyclical industries with recurring revenue models and cash flow predictability.”
Claret has backed 29 companies with the debt fund since March 2021. The investor plans to support 50-60 companies in total, including through co-investments. Bateman says Claret has already made four co-investments in this fund. Co-investments in previous funds include recruitment platform Jobandtalent and insurtech WeFox.
Claret’s investors in the fund include former Claret backers EIF, British Business Investments, RAG-Stiftung, Certior Capital and KfW Capital. The new institutional backers are Allied Irish Banks, Aozora Bank, Banca March, HNA and the Ireland Strategic Investment Fund (ISIF).
Eleanor Warnock is associate editor of Sifted and co-host of The subdued podcast. She tweets from @misssaxbys