Venture capital, a form of investment for early-stage, innovative businesses with strong growth potential. According to the Brazilian Association de Equity e Venture Capital, Brazil has the largest venture capital market in Latin America, with R$153.22 billion in volume and with a growth in this area of 28% per year.
Although the steady growth, we have seen a strong reduction in investments in this modality in recent months, largely due to macroeconomic issues such as global retraction and high economic interest rates, largely due to macroeconomic issues such as a global economic downturn and rising interest rates, causing a lower willingness of funds to inject money into risky companies. But also, because venture capital funds have changed the rationale for investment decision making: the capacity for accelerated growth (scale up), which in recent times has been the main investment foundation for venture capital funds in Brazil, has given way to the company’s capacity to generate wealth for its shareholders (EBITDA). In other words, capital became more expensive and scarcer.
In this scenario, start-ups are having to reinvent themselves to raise capital, which favors the venture debt market. This model differs from venture capital because it is a real debt instrument, often without the option of converting into equity. Venture debt usually has a higher cost than regular financing, linked to a premium if the company reaches certain financial metrics or even in the sale of equity. They normally require guarantees in excess of the contracted amount, whether receivables from customers or real guarantees on shares or assets of the company.
The first major movement in the Brazilian venture debt market started just before the pandemic but took shape and size during the pandemic. It had a decline last year with the scenario of low interest rates, capital market growth and high liquidity. Now, it is once again a good alternative in the market for start-ups and fast-growing companies, and we are seeing not only funds and family offices interested in lending, but also traditional banks creating products for this market.
Although it is becoming a good funding alternative for Brazilian startups, in view of all the advantages it offers, such as the non-dilution of partners, the rapid increase in the company’s liquidity and terms more consistent with the life of startups, caution is necessary.
Every company that intends to venture into the debt market needs adequate planning, with the advice of qualified professionals, so that the advantages of the venture debt become a propellant for them, and not a snowball of interest.
