Bay Area startups are raising big debt rounds to survive tough funding environment

Despite rising interest rates, Bay Area startups have raised some eye-popping venture debt deals this year. It comes during a months-long pull back from venture capital investors amid rising interest rates and concerns around a looming recession.

Debt deals typically involve either opening a line of credit or taking out a loan.

2022 is not shaping up to set any records when it comes to the total number of debt deals that closed or their total value, and new PitchBook data shows that fewer companies have closed larger debt deals this year — a trend that tracks locally and nationally.

A decade ago, a little under 1,400 startups around the country collectively raised $7.5 billion in venture debt. Even with one quarter left in the year, that amount has tripled this year to $22.8 billion even though the number of startups closing debt rounds has only increased by around one-third to 1,925, according to PitchBook.

Total venture debt has also remained above $20 billion annually since 2018 with 2019, 2020 and 2021 each clocking in at around $33 billion. Through the end of September, the value of the debt raised this year is 30% below the previous year's value.

Locally, 2020 holds the record for the most debt raised. Nearly 570 Bay Area startups raised $9.2 billion in debt that year, and after several years of increase, the amount raised appears to be declining for the second consecutive year.

In 2021, 644 Bay Area startups raised $8.1 billion — both a slight increase in the number of deals closed and a slight decrease in their value.

As of mid-November this year, 341 Bay Area startups have raised $7.1 billion in debt — a 12% drop in value but also a 47% drop in the number of startups that closed these deals.

In other words, fewer Bay Area startups closed debt deals this year but they were larger, on average.

More than two-thirds of venture debt deals are raised by later-stage companies, although the median value has declined to $3.8 million through the end of September compared to $4 million in 2021, according to a report from PitchBook and the National Venture Capital Association.

But earlier-stage companies are also raising larger debt rounds and the median debt round at this stage was $2.4 million through the end of September, up from $2.1 million in 2021.

The largest debt deal in the Bay Area so far this year was $404 million from Ratio, a San Mateo-based fintech that enables software companies with subscription revenue streams to embed "buy now, pay later" features into their platforms.

Several startups raised $200 million debt rounds, including San Francisco-based car rental service Kyte and "buy now, pay later" health care service PayZen.

A hardware and artificial intelligence company based in Menlo Park, Leia Inc., also recently announced a $125 million debt round that it raised from London-based financial services firm Aon, which would put it in the Bay Area's top 20 rounds of the year, though PitchBook excluded the deal from data provided to Bay Area Inno until it officially closes. Leia told me the debt round closed in September.

Leia is developing nanotechnology that makes images on screens appear 3D without the need for VR headsets or any type of special glasses.

"You can always argue, should you take equity? Should you not? For us, it was important to get a few great partners on board that continue the mission we are on, who understand and want to partner with us for a period of time. We felt that we found that in these guys," said Cecilia Qvist, CEO of Leia.

Despite the risks that come with having to pay interest on debt, Qvist sees benefits in choosing debt over an equity raise but the company hasn't ruled another equity raise out. The main tradeoff of an equity funding round is giving up some ownership stake to investors. Leia has also raised $165 million through a Series C. 

"We're fortunate enough to have a very, very tight cap table where the people who work for the company own the company, which gives us some flexibility," Qvist said. "The day you decide to take a big check from somebody else, it gives you some pros and cons. I will say we are in dialogue with a few and we have been pretty heavily courted the past three months."

Venture firms are largely holding onto their available cash, or dry powder, this year.

In the September quarter, global funding dropped 33% over the previous quarter and was also down more than 50% over the previous year. Later-stage funding has been hit the hardest and was down 63% over 2021, according to Crunchbase, while early-stage funding was down 39% and seed-stage funding relatively flat.

 

Here are the Bay Area's top 20 debt rounds of 2022, as of mid-November:

*announced but not closed as of mid-November, according to PitchBook.