When it comes to financing a path to growth, the primary focus for early-stage startups remains venture capital. While raising a sufficiently large pre-seed round is certainly key, there are other important – and often overlooked – instruments that early-stage founders can access. In part one of this series, inspired by one of our b2venture Expert Exchanges, we look at non-dilutive financing methods, especially venture debt, and how startups can plan, access, and manage them.

As Sifted recently reported, debt financing remains a strong pillar of the startup economy, with particularly strong growth in capex-heavy verticals such as spacetech and dual-use. Our upcoming second article will dive into one of these verticals where non-dilutive financial instruments can unlock new growth opportunities: working-capital intensive B2B marketplaces.

What is venture debt?

Venture debt is the most prominent, but not the only, debt financing tool available to startups. As a company grows, its options widen to include cheaper, more structured instruments like working capital lines, factoring, or asset-backed facilities. Ultimately, many companies end up leveraging multiple forms of debt financing – but nearly all of them start out with venture debt, especially in the early days, when there are only few proof points for debt providers.

Venture debt is simply a loan that specialized financial institutions such as dedicated venture debt funds give to venture-backed startups. Lenders do not take equity or board seats; instead, their risk is managed through interest and warrants. Venture debt works differently than a traditional bank loan, which is not tailored to startups, as these early-stage companies are often still unprofitable, cash-burning businesses with a limited financial history and little tangible assets to take security on – traditional bank lenders usually consider such a profile too risky to lend against. In contrast, for venture debt lenders, the major factor is trajectory – valuation, intellectual property, the cap table, or the ability to raise the next equity round.

Why take on venture debt?

Besides working capital or capex financing, one of the main early-stage use cases for venture debt is extending runway between equity rounds. That is particularly useful when a company wants to buy more time before entering its next round from a position of strength – improving metrics and hitting milestones to secure a better negotiating position. In these cases, venture debt can act as a good hedge against down rounds or excessive dilution if used cautiously and wisely.

But there are plenty of other good reasons to take it on. Startups with working-capital-intensive models, e.g. B2B marketplaces applying a "merchant of record" model, can use venture debt to build a competitive advantage early, since it lets them offer more attractive financing terms to suppliers as the business scales. This strategy, applied to B2B marketplaces, is the topic of our second article in this series.

How to become eligible?

"Eligibility" – rather than "bankability" – arrives earlier than most founders expect: roughly EUR 7–10m raised in a single round, evidence of enterprise-value creation (even pre-revenue deep tech can qualify), and reporting a lender can rely on. A founder who is comfortable with the numbers is usually enough – a dedicated finance team is not required, but it is recommended to start building out a finance function when taking on venture debt.

Who is lending?

There are three general types of venture debt lenders: funds, banks, and public institutions. All three offer venture debt, but each comes with different incentives, which shapes both the strategy for approaching a given lender and the timeline you can expect.

Venture debt funds, like Kreos Capital, BlackRock, or Claret Capital, raise money from LPs just like venture capitalists – but instead of buying equity, they focus on lending. With this category of lender, check actual availability against the headline number: how much of the fund's capital has already been deployed, how much is realistically left for your financing needs, and where the fund stands in its lifecycle.

With banks, check whether venture lending is genuinely core to their strategy – expect it often to be part of a cross-sell play. With public institutions (the EIB, regional development banks), expect a political mandate, heavier project framing, stricter governance, and slower execution: twelve months to close is not unusual.

What risks does venture debt hold?

While venture debt can certainly unlock new opportunities for early-stage startups as well as scaleups, it is an instrument that must be used cautiously and wisely. In that regard, founders need to know the main risks of debt financing, and weigh them against the potential benefits.

Most importantly, the founders and investors have to be sufficiently confident in the continuous scaling potential of the startup. If the business is not predictable enough yet, taking on venture debt early on can result in increased complexity that will complicate things down the road. In any case, taking on too much debt too early can create significant next-round risks, especially when growth slows and the amortization still has to be serviced. That is one of the reasons why the entire cap table should be aligned before taking debt financing instruments into consideration. Keep in mind that there are investors that might be structurally opposed to debt on principle, so it is advisable to check expectations as early as possible.

Also, the devil is in the details: venture debt terms have to be clearly defined. Founders should be extremely cautious with so-called "covenants," which may allow lenders to demand an early repayment of the debt in case the business does not perform as expected. In the worst-case scenario, such terms give significant leverage to lenders, who could enforce an insolvency filing by demanding an early repayment of the loan. Keep in mind that in the liquidation preference waterfall, debt always ranks higher than equity, meaning that lenders are always serviced before equity holders. Typically, so-called "warrants" are also part of the lenders' upside, and rank superior to common equity, too.

Finally, take an honest look at the refinancing reality: once a company takes on debt, it tends to stay on that path, since repaying it with equity is itself a dilutive event. It is worth asking honestly whether the facility can be repaid or refinanced in four to five years.

This article has been inspired by our b2venture Expert Exchange, which brings together experienced operators and industry experts on topics that matter to founders. For this session on debt financing, we were joined by:

• Kerimcan Oral: CFO of CoachHub - The digital coaching platform, with hands-on experience raising and scaling venture debt as an operator.
• Markus Harder: former CFO of DeepL and Contentful, now Group CFO of a&o Hostels, with exposure to a range of debt instruments across stages.
• A venture and growth debt investor: currently leading growth debt financings for European tech and life science companies at a global asset manager; previously part of the founding team that built a US tech bank's German lending business.

A big thank you to all of our experts for sharing their insights with us.

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