Persado chief executive officer Alex Vratskides could raise venture funding. He’s just not sure he wants to.
His New York-based startup doubled annual revenue in 2016 and is on track to break even in 2017. Valued at about US$200 million in April, the marketing automation company counts Bain Capital and Goldman Sachs among its backers — a source of validation in the eyes of many venture investors.
But Vratskides thinks there’s a better way to reach the finish line: take on debt. “Interest rates are low, and you avoid dilution. It’s a no-brainer,” says Vratskides, who is angling to secure a loan of US$30 million or so in the second half of 2017. “It is potentially our first preference going forward.”
In 2015, venture capitalists plowed a record US$79 billion into startups at often unsustainable valuations. Enthusiasm waned in 2016, when fewer startups got funded, and those that did faced more scrutiny and tougher deal terms. While the market has recovered somewhat in the past few months, it’s down 10 per cent from its high mid-2015, according to the Bloomberg U.S. Startups Barometer, an index tracking funding and exits for private companies.
Venture deals in 2016 — for all but the hottest startups, anyway — required founders to give up more equity in exchange for less money than they did last year. So, despite cautionary tales from tech blog GigaOm and game console maker Ouya, which both flamed out after failing to pay back lenders, U.S. startups have loaded up on debt, enabling them to borrow money without ceding a potentially lucrative stake.
When things go bad, they go very bad, but there’s usually little information about the wind-down. Silicon Valley buries its dead very quietly.
No one publishes national data on venture debt, but a half dozen lenders provided numbers showing activity spiked in 2016. Silicon Valley Bank’s loan-volume to venture-backed startups surged 19 per cent during the past year to US$1.1 billion for the quarter ending Sept. 30. Wellington Financial made more than 10 new loans to venture-backed startups in 2016, double 2015’s total. At Hercules Capital, annual volume is up and the average deal size increased 16 per cent year-over-year to US$15.6 million. TriplePoint’s volume is up more than 25 per cent. Western Technology Investment CEO Maurice Werdegar called volume “robust” and described the lending environment as “hyper-competitive.”
Borrowing capital allows startups to postpone valuation negotiations that come with raising equity. Startups fear the prospect of selling shares at a lower price, known in the industry as a down round. “Folks don’t want to do down rounds or…