online education

Probably the most mature startups flip to debt financing

With the funding crisis the tech industry has been experiencing in recent months, all startups are struggling to survive. But not everyone has the same opportunities. As the youngest and least funded try to sell themselves, the more mature scale-ups are taking on more debt. “We have more and more mandates to take on debt. These are scale-ups that want to continue financing their growth while paying more attention to their profitability profile,” confirms Philippe Englebert, Manager at Lazard.

The same observation on the side of Goldman Sachs in France. “Sometimes we started a process of raising equity with start-ups and completed or complemented it with third-party or hybrid instruments,” says Guillaume Amar, tech manager of the American bank in France.

There are two categories of startups: those that don’t raise funds and go into debt, and those that directly consider taking out a loan. “They know how to adapt growth to market conditions and can play with the financing. They are digital ETIs,” says Paul-François Fournier, Executive Director of Bpifrance’s Innovation Department.

Slower Banks

Malt, a platform for connecting freelancers and companies, expects a debt of 40 million euros. “Equity is more complicated and increasingly expensive. Borrowed capital represents an additional financing lever and provides flexibility for acquisitions,” emphasizes Alexandre Fretti, co-CEO of the young offspring, who raised 80 million euros in June 2021.

Lenders, for their part, are very demanding. “We’re being contacted by a lot of banks, particularly French and British ones,” says Benjamin Gaignault, co-founder and CEO of Ornikar, the online driving school, which is making sure not to seek funding for the time being. “We’ll see if conditions continue to be less comfortable,” he adds.

For his part, Malt applauds the proactive nature of French banks, which have not always been big fans of French technology. “They are slow in their decision-making processes, but everyone is equipping themselves with scale-up devices to be more efficient and serve the ecosystem,” stresses Alexandre Fretti. “French banks have come a long way. They now have specialized teams. This is a sign that we have created a new digital sector,” adds Paul-François Fournier.

American banks are also going on the offensive. According to our information, JP Morgan organized a dinner with handpicked French tech entrepreneurs this week. With entry through the debt window, the banks are also planning a very specific date: the IPO.

Software is the best candidate

Another type of player is also chasing French scale-ups: debt specialists. American Sixth Street, which helped take down Contentsquare last summer, is one of them. But also more general players like BlackRock. “These debt investors are very experienced, they’re used to looking at these types of files. They have strong training in the notion of profitability and cash flow generation. They speak a language that appeals to founders who want to buy from the catwalk [de la trésorerie, NDLR] and who don’t focus everything on growth,” emphasizes Guillaume Amar.

These players are specialists in “ARR funding,” meaning they lend an amount based on ARR, Annual Recurring Revenue, the key metric in the subscription software (“SaaS”) world. “SaaS is right for debt: they have strong growth profiles, recurring revenues and a clearer path where it’s really easy for them to reach profitability,” Guillaume Amar points out. “Not all start-ups are eligible. You need a minimum of recurring and / or profitable business that you stick the debt on, ”says another banker.

For riskier and younger profiles, there remains the “venture debt”, an instrument that is underdeveloped in France. “Venture debt is an instrument that can be particularly interesting in times of crisis. But it is mechanically more expensive because the seating risk is higher. It has to be handled with care,” warns Paul-François Fournier.

The Frenchman Isai entered this niche at the beginning of the school year with a first closing of 40 million euros. It is aimed at young companies that achieve strong sales growth of at least 4 million euros and are on the way to profitability or are already profitable. More generalist players are also starting to borrow in the tech sector, such as Blackstone ($880 billion under management), which will invest at least $2 billion in debt in development-stage startups. IPO and post-IPO. According to PitchBook, the amount of venture debt originated in the United States has increased from $4.4 billion in 2010 to $33 billion in 2021.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button