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When Bench, a thriving accounting startup, suddenly shut down last month, it was due to the lenders calling in the company’s loan. Another digital freight company, Convoy, faced financial issues in late 2023, leading to venture lending firm Hercules Capital taking control to recover its investments.
Divvy Homes, which was recently acquired by Brookfield Properties for around $1 billion, left some shareholders empty-handed. The company had borrowed $735 million from various lenders in 2021, including Barclays, Goldman Sachs, and Cross River Bank.
The Unsteady Startup Scene
Many startups that were poorly funded in 2020 and 2021 are already failing, but data suggests that more will follow suit in 2025. Venture debt is also on the rise, with $41 billion invested across 2,339 deals in 2021, a record according to Silicon Valley Bank.
“We’re reaching a breaking point for many companies,” stated David Spreng, founder and CEO of Runway Growth Capital. Concerned about their investments, lenders are pressuring startups to sell to minimize potential losses.
Increasing Risks and Challenges
While debt can help startups meet cash needs without giving up equity to VCs, it also raises the risk of adverse outcomes. Companies with high debt relative to income or cash reserves may face a forced sale or foreclosure by lenders.
Tech and VC Disruption in 2025
As tech and VC heavyweights prepare for Disrupt 2025, startups are urged to secure more funding to avoid lender intervention for late payments or breaches of agreements. Slow-growing startups from 2020 and 2021 are failing to justify their high valuations, making investors wary of further funding.
Markell predicts that many unicorns may soon go out of business, forcing startups to sell at low prices or close down. However, most lenders hope for a successful sale, even if it means a fire sale.
Venture Debt Trends
Despite the risks, venture debt issuance hit a 10-year high of $53.3 billion in 2024, with a focus on AI companies. CoreWeave and OpenAI are among the notable companies securing billions in debt financing, showcasing the continued appeal of venture debt in uncertain times.
