“VC often stands more for vulture capital than venture capital,” quipped Florent Gros, managing director of the Novartis Venture Fund, during a panel at the first Venture Debt Summit.
Venture capitalists are, indeed, called vultures by some entrepreneurs for their tendency to squeeze out founders and take off with what they can from any business they invest in. Founders, of course, don’t want to surrender ownership of the companies that grow out of their initial ideas.
That’s where venture debt comes in. The European Investment Bank, which hosted the summit on 23 March, developed the product three years ago. It offers young companies financing that complements other possible sources of finance, such as venture capital, without diluting the ownership of the founders. It is a quasi-equity product, a loan with repayments that depends on the performance of the company. When the EIB makes a quasi-equity investment, it gets warrants for shares in the company, but along with call and put options for the entrepreneurs to retain their share.
The product has been a huge success. The EIB venture debt team has reviewed more than 2 000 requests and signed with 63 companies for around EUR 1.2 billion, according to Hristo Stoykov, head the Bank’s growth capital and innovation finance division. The product is now backed by the European Fund for Strategic Investments, which includes an EU budget guarantee and is a main pillar of the Investment Plan for Europe.
The fear of dilution is striking. Atanas Kolev, senior economist at the EIB, presented data from the Bank’s annual Investment Report showing only 1% of European firms want external equity to play a bigger role in their financing mix. Companies think they can invest and grow without diluting their ownership through external equity financing. Firms finance investment predominantly through internal sources. External finance represents less than 40% of firms’ investment finance, with bank debt and leasing prevailing.
There are other factors making venture debt an appealing option for companies. Like the absence of other options, for some companies in between the start-up phase and going public, which represents one of the market gaps that the Investment Plan for Europe aims to fill.
Véronique Trausch, partner at FinDeal Advisers, said venture capital funds in Europe tend to have very little interest in doing so-called C and D rounds of financing. There are the more high-volume financing rounds for companies that have already raised their initial capital. One of the problems, according to Trausch and several others speaking up at the summit, is the small size of most VC funds in Europe—around EUR 100 million on average. They can hardly participate in financing rounds that may be around the same amount. “The EIB is really the only player in this area,” she said. The Bank is Europe’s largest venture debt provider.
This was confirmed by the presence of—and comments from—representatives of 35 innovative portfolio companies in various sectors such as life science, biotech, software, 3D printing, robotics, clean technologies and artificial intelligence. The company representatives and their financiers from private funds, financial advisors, the European Commission, and others spent the day discussing why financing for innovative companies in Europe lags behind the US and Asia, and how practical steps such as the new products being offered by the EIB can help close the gap.
“This is just a start,” Stoykov promised.