STARTUP FINANCING
Venture debt has moved from niche tool to core layer of the startup capital stack. That makes founders more flexible and turns startup risk into private credit, with all the liquidity questions that come with it.
Key takeaways
- Follow-on venture debt rose from $4.7 billion in 2024 to $12.3 billion in 2025, and late-stage venture debt hit decade highs in early 2026 (PitchBook).
- Venture loans are bespoke, unrated and rarely traded, so they are marked to model and priced only when a lender is forced to sell.
- Equity investors should read the whole capital structure, and lenders need a real secondary market for venture credit.
The Quiet Shift in the Capital Stack
Ask most people how startups are financed and they will describe a sequence of equity rounds: seed, Series A, Series B and onward. That picture is increasingly incomplete. Underneath the headline rounds, a growing share of startup capital now arrives as debt.
Venture debt is a term loan to a venture-backed company that would not qualify for a conventional bank loan, typically sized as a fraction of the last equity round or of recurring revenue. It used to be a niche product dominated by a single bank. After Silicon Valley Bank failed in 2023, that market share spread across specialist lenders, publicly traded business development companies and, notably, large private credit funds that saw an opening.
The numbers show the shift. PitchBook data reported earlier this year showed late-stage venture debt reaching decade highs in the first quarter of 2026, with AI companies in particular choosing lenders over new equity investors. Follow-on venture debt, meaning repeat loans to existing borrowers, rose from $4.7 billion in 2024 to $12.3 billion in 2025. This is no longer an occasional bridge. It is becoming a standard layer of the stack.
Why Founders Are Saying Yes
The appeal is easy to understand. A founder who sells equity gives up ownership forever. A founder who borrows gives up a coupon and some warrants. Current market guides describe pricing for a Series B company at roughly the secured overnight financing rate plus 600 to 900 basis points, landing around 10 to 13 percent all in, plus fees and warrant coverage of about half a percent to one and a half percent of the loan.
For a company that expects its valuation to rise, that trade is attractive. Debt can stretch the runway six to twelve months, carry the business to the next milestone, and allow the next equity round to be raised at a higher price. In a market where, as we saw in the third quarter, mega rounds dominate the headlines and many solid companies struggle to command attention, borrowing can be the difference between raising from strength and raising from need.
I have nothing against leverage when it is used deliberately. Leverage turns a good plan into a better outcome. It also turns a missed plan into a crisis faster than equity ever will.
The Lender’s Side of the Table
Every venture loan is someone else’s asset. When a fund lends to a startup, that loan sits in a private credit portfolio next to loans to mid-sized manufacturers and software buyouts. The lender’s return depends on two things: the company paying on schedule, or, if it does not, the lender recovering value from whatever is left.
Startups make that second part difficult. They rarely own hard assets. Their value lives in code, customers and people, all of which can leave quickly. Covenants are lighter than in traditional lending. And many venture loans quietly rely on the assumption that the next equity round will refinance or support them. When equity is concentrated in a small set of names, that assumption deserves more scrutiny than it usually gets.
There is also a timing mismatch worth noticing. Venture loans usually run two to four years. The equity they support is often expected to be held for a decade. If the company performs, the loan is repaid long before anyone knows whether the equity thesis was right. If it struggles, the lender is the first to feel it, and the decisions the lender makes, whether to extend, restructure or sell, can shape the outcome for every shareholder below. Equity investors who ignore the lender are ignoring the party with the most leverage in a bad quarter.
The Loan Nobody Can Sell
Here is the structural issue. A lender that wants to reduce exposure to a struggling borrower, rebalance a portfolio, or meet redemptions has very few options. Venture loans are bespoke. They are not rated, rarely syndicated, and almost never traded in a visible market. There is no screen showing where a loan to a Series C software company should be priced this week.
So these loans are marked to model, much like the equity above them. When conditions change, the marks lag. When a lender finally needs to sell, it discovers the price through a handful of private conversations, often at a discount that surprises everyone, including the auditors. The same opacity we criticize in private equity valuations now runs through the debt that funds startups.
What Investors Should Watch
For equity investors, the lesson is to read the whole capital structure, not just the cap table. Debt sits ahead of you. Ask who the lender is, what the covenants are, when it matures, and what happens if the next round slips.
For lenders and the investors in their funds, the lesson is about liquidity and price discovery. As startup risk migrates into private credit, the need for a functioning secondary market for these loans grows with it. That means infrastructure that can surface buyers who actually understand venture credit, match them discreetly with sellers, and build pricing benchmarks from real transactions rather than models. The startup world and the private credit world have merged. The tools for trading what they create together have not caught up yet.
#VentureDebt #PrivateCredit #StartupInvesting
Bruce Bendell is an investor in startups and private companies and a five-decade operator in the automotive industry. Follow him on LinkedIn.