Silicon Valley start-ups turn to debt deals amidst VC slowdown

With venture capital funding decreasing due to economic uncertainty, start-ups across Silicon Valley are turning to alternative financing deals for the prospect of sustained growth

The Financial Times reported that the likes of cyber security company Arctic Wolf and delivery apps Gopuff and Instacart are looking to evade valuation cuts through debt-focused deals such as convertible notes, bridge loans, and participating bonds.

This shift comes with the aim of avoiding a downturn in valuation compared to figures previously secured by start-ups.

>See also: Tech startups appeal against cuts to R&D tax credits

Turning to convertible notes

Convertible notes are short-term debt agreements that can be turned into equity, usually in conjunction with a prospective funding round.

A conversion premium coming with such deals allows investors to convert shares at a higher price than a future IPO, while betting on higher trade points after going public.

Arctic Wolf is among the largest debt deals completed this year, with a $400m convertible note in October — twice as large as its largest equity financing.

Meanwhile, delivery app Gopuff raised a $1bn convertible note in March this year, and has been exploring possible further borrowing, despite raising over $2bn last year.

According to Baillie Gifford investor Chris Evdaimon, convertible notes “kick the can down the road.

“They are mostly being led by existing investors who are saying we also don’t want to get into this unpleasant valuation discussion right now.”

A growing funding trend

According to interviews with venture capitalists, entrepreneurs, bankers and pension funds, a growing amount of organisations are looking for more creative funding approaches to mitigate losses.

One Sand Hill Road investor told the FT that “everyone is taking corrective action”, before going on to state that even founders of more established companies have had to ask: “What are the adjustments [we need] so we can live longer, how can we punt financing from next year into 2024?”.

VC funding has seen a decline globally, adding to financial concerns on the part of start-ups brought by a widely uncertain economic climate, as well as a closed market for initial public offerings.

Big tech companies such as Twitter and Amazon, meanwhile, have opted to either slow down hiring processes, or lay off staff to cut costs.


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Aaron Hurst

Aaron Hurst is Information Age's senior reporter, providing news and features around the hottest trends across the tech industry.