Tech financing on the rise: Key trends in global innovation banking

The world of financing for startups and tech companies is looking up. After nearly two years of being slowed by economic weakness and high-interest rates, the venture capital scene is finally showing signs of recovery. Last year was tough, with fundraising, deal-making, lending, and exit opportunities all hitting multi-year lows.

But 2024 looks a lot better. Thanks to a global stock market rally and a surge in interest in AI innovation, we’ve seen some major IPOs and a renewed appetite from investors.

We’re seeing a strong pipeline of opportunities across both venture and growth,” shared Chris Arsenault, co-founder and partner at Inovia Capital, a Montreal-based VC firm with investments in companies like Lightspeed. “Company fundamentals are healthier, and valuations are aligning with the current market expectation.

According to PitchBook, an industry data provider, U.S.-based venture capital funds have raised about $37 billion in the first half of this year, putting 2024 on track toward at least no worse than last year’s $82 billion in funding. VCs are also putting more of their raised cash to work. The value of U.S. deals in the second quarter this year shot up by almost 50%, hitting a two-year high. Exit opportunities like acquisitions, IPOs, and buyouts are also trending up compared to last year if first half trends continue.

Investors are optimistic but still cautious. The market is resetting. High valuations are adjusting in some cases. Interest rates are expected to stay high for a while, even as the Federal Reserve prepares to start lowering them. And though there’s a rebound, deal activity is still far from its peak. No one is getting too far ahead of themselves.

In some cases, companies are choosing to push off their next equity rounds, hoping for better market conditions down the line. And as they stay private longer, they’re increasingly turning to debt to extend their cash runways.

One outcome of the current environment of cautious optimism has been to bring debt to the forefront for many venture-backed companies.

Venture debt is a form of funding for startups and early-stage companies that complements equity funding. For entrepreneurs, it offers capital with minimal dilution, secured against assets or future cash flows.

“Debt financing definitely provides us with a lot more flexibility,” said Amy Wang, Chief Financial Officer at Procurify, a Vancouver-based spend management solution software startup. Wang said the Company added debt financing on top of the $50 million USD in Series C funding last year as a non-dilutive way to extend their runway and fund strategic initiatives. “Debt financing has complemented our recent equity raise, providing added flexibility and enabling us to act swiftly on growth opportunities.”

PitchBook’s latest data shows that U.S. venture debt deals in the first half totaled $23.5 billion, versus $27.1 billion for all of 2023. In the first six months of this year, venture-backed firms raised $2.5 in debt for every $10 in equity, well above historical averages of about $1.5 billion.

This trend isn’t just in the U.S. — there’s growing interest in venture lending across Canada, Europe, Asia, and the Middle East.

According to Sifted, which tracks the industry across the Atlantic, European startups have raised 18.7 billion euros in debt funding so far in 2024, a strong showing.

What’s even more notable is that growing interest in venture debt is taking place at a time when the industry itself is undergoing a transformation as it adapts to the failure last year of Silicon Valley Bank.

Instead of creating a vacuum, the collapse of SVB has only intensified the competitive landscape, with new entrants trying to attract customers.

“Venture Debt has become extremely competitive in the last few months,” Inovia’s Arsenault said.

Borrowers, meanwhile, are also becoming more discerning about who they bank with. The net result has actually been to make the debt financing ecosystem for startups more robust and resilient, which may explain its renaissance.

In the face of a weaker economy and historically higher interest rates, lenders have been adopting more prudent approaches. Many are focusing on established products that generate revenue, such as Software as a Service (SaaS) businesses that have strong, multi-year contracts that can generate reliable cashflows.

Startups, meanwhile, are increasingly seeking lenders with robust balance sheets, leading to a higher demand for services from large, well-capitalized and established banks that offer financial stability. Specialized or regional lenders offer bespoke services but often fall short in ability to withstand financial shocks.

Tech companies still need bankers that have experience of lending to a startup. It’s not a straight line; working with a bank who has seen the different economic cycles is critical.

Large banks have long wanted a bigger slice of the startup pie, but experienced banking teams who are close to the industry still have an edge. No matter the changing dynamics, financing startups is still inherently a long-term game.