When accounting startup Bench abruptly failed last month, the shutdown was forced when the company’s lenders called in the startup’s loan. In late 2023, the digital freight company Convoy faced financial challenges, leading venture lending firm Hercules Capital to assume control of the company to recover its investments.
Divvy Homes, which sold for about $1 billion to Brookfield Properties last week, has left some of the company shareholders without any payout, TechCrunch reported last week. Although the specific role of Divvy’s lenders in the sale is unclear, the company borrowed $735 million from Barclays, Goldman Sachs, Cross River Bank, and others in 2021.
After so many weak startups were funded in 2020 and 2021 with famously lax diligence, many of the weakest startups have already failed. But data suggests we haven’t hit bottom yet, and many more will die in 2025. And venture debt will play a role after investing $41 billion across 2,339 deals, a record for the time in 2021, according to Silicon Valley bank.
“We’re getting to the end of the rope for a lot of companies,” said David Spreng, founder and CEO of venture debt provider Runway Growth Capital.
Concerned about the future of their investments, lenders are increasingly pushing startups to sell themselves to minimize potential losses, Spreng believes.
Nearly every lender has troubled companies in their portfolio now, estimates John Markell, a managing partner at venture debt advisory firm Armentum Partners.
While debt can help fast-growing startups meet their cash needs without selling off chunks of the company to VCs, it also increases the risk of negative outcomes. Too much debt compared to a startup’s income or cash reserves can result in a forced fire sale, where a company is sold for a fraction of its previous value. Or lenders may resort to foreclosure, so they can claim any underlying assets used to secure the loan, to recover at least some of their investment.
If startups can convince new or existing VCs to inject more cash by buying more equity, they can avoid a lender taking action should they fall behind in payments or other aspects of their agreements. For instance, some venture debt agreements have liquidity and working capital ratio requirements. If a startup’s cash falls too low, a lender could take action.
But investors are reluctant to keep funding startups that are growing too slowly to justify the sky-high valuations they achieved in 2020 and 2021.
“Right now, there’s so many troubled companies,” Markell said. “A lot of unicorns are not going to be in business soon.”
Spreng also predicts that many startups will have no choice but to sell for a low price or shut down this year. But for now, most lenders still hope these startups can find a home through a sale, even a fire sale.
In situations where lenders are forcing an acquisition, equity investors are generally not getting much of the money being paid, and often not even making their money back, said Markell. Losses on investments into startups are risks venture capitalists know will occur.
When a sale does happen, Spreng says many of those transactions remain undisclosed due to unfavorable outcomes for venture investors. No one wants to take a victory lap when they lose money on a sale.
However, since debt holders have priority in repayment, venture lenders are less likely to lose all of their capital.
But the risks associated with venture debt haven’t slowed its appeal. In 2024, new venture debt issuance reached a 10-year high of $53.3 billion, according to PitchBook data. A significant portion of that capital was directed toward AI companies, with notable examples, including CoreWeave, which secured $7.5 billion in debt financing, and OpenAI, which obtained a $4 billion line of credit.
