Growth Debt: A Strategic Financing Option for Startups

Stephanie Heller and Fatou Diagne, co-founders at Bootstrap Europe, shared their thoughts on Growth Debt when to look into this asset class, and what growth debt investors are looking for from a founder/company.

Stéphanie Heller is a managing partner and co-founder at Bootstrap Europe, a London-based investment firm that focuses on fast-growing technology companies. The team at Bootstrap has financed more than € 1 billion in loans to more than 250 companies in Europe.

Fatou Diagne is the co-founder and managing partner of Bootstrap Europe, which actively sources and evaluates growth companies eligible for debt financing.

Growth Debt: A Strategic Financing Option for Startups

Growth debt is a specialized form of financing tailored to the unique needs of startups and high-growth companies. Unlike traditional bank loans or equity financing, growth debt is structured to align with the specific requirements of rapidly expanding businesses.

Specialized lenders, often called growth debt firms, provide this type of debt. They understand the dynamics of high-growth environments and can offer financing that traditional lenders may not.

This financial tool is designed to fuel the expansion of successful startups, enabling them to scale operations, enter new markets, invest in research and development, and even complete acquisitions. It can also play a crucial role in helping startups prepare for an acquisition themselves. However, accessing growth debt is not straightforward; it is only available to a small percentage of European tech businesses, typically between 2% and 5%. To qualify, these companies must demonstrate a proven revenue-generating business model and significant growth potential.

When Is Growth Debt the Right Choice?

Growth debt is most beneficial for startups in specific scenarios:

1. Bridge Financing for Exits: Growth debt can act as bridge financing when there is a gap between signing a deal and completing an exit. This ensures the company has the necessary funds to continue operations and meet strategic goals while waiting for the exit. By having more cash on hand, companies and their management can maintain stronger negotiating power.

2. Extending Runway Between Equity Rounds: Startups often seek to extend their runway between equity financing rounds. Growth debt can provide the capital needed to reach the next milestone without the immediate dilution of issuing new equity. This allows the company to continue progressing toward its goals while awaiting the next equity funding round.

3. Milestone Financing to Avoid Dilution: Growth debt is an attractive option when a startup hits a significant milestone but wants to avoid raising equity at a potentially lower valuation. It enables the company to secure additional funds without renegotiating valuation terms, particularly valuable in a market with declining valuations.

4. Meeting Working Capital Needs: Rapidly growing startups often face working capital challenges. Growth debt can finance essential operational costs, such as inventory, accounts receivable, or other expenses. In deep tech businesses, growth debt can also finance equipment and initial plant setup.

5. Enhancing Capital Efficiency: By using growth debt strategically, startups can leverage their existing equity capital more effectively. This allows them to separate certain expenses from others, manage their capital structure efficiently, and maximize returns for existing shareholders. Growth debt helps avoid unnecessary dilution and ensures that the company’s equity is used most productively.

Is Growth Debt Right for Your Startup?

Growth debt is most suitable for startups with a proven revenue model and a clear path to profitability. Based on performance metrics, lenders assess the company’s financial health and ability to meet debt obligations. High growth is critical, as growth debt is intended to accelerate revenue generation and maximize equity value.

This type of financing is often introduced by experienced board members or venture capitalists who are familiar with its benefits. However, to effectively manage growth debt, companies need a strong CFO and robust financial systems to meet the high standards required by lenders.

Understanding when to raise growth debt is crucial. It requires careful consideration of the company’s stage, funding needs, and strategic goals from both the lender’s and founder’s perspectives. When used wisely, growth debt can complement equity financing, providing startups with the flexibility and financial resources needed for sustained growth.