Hello and welcome to the first ever Sherbrooke podcast.
I am your host, Nicholas, never Ling, the editor of Real Deals
magazine. And on today's program, we will
be talking European Venture debt at first glance taking on debt,
may seem like an odd thing for startups that are cash, flow
negative to consider. But the creation of a venture
debt Community has been identified as a crucial Tone of
any thriving startup ecosystem. Indeed in her eponymous and
landmark study on the state of the UK startup scene serial
entrepreneur chirico to listed the creation of a thriving
Venture debt Market as a key enabler of Rapid company growth,
the numbers, tell the story in the established u.s.
Venture market around a fifth of us companies, take on Venture
debt in the UK, the figures less than 10%.
To help understand how ventured it supports companies in scale
up mode and dig into why sponsors and Entrepreneurship,
seriously consider taking it on. I'm joined by two guests.
Will Chapel is the head of growth capital and Venture AT
schulberg bank and as Finance growth in technology businesses
for more than a decade. He was one of the founding
members of the Barclays Venture debt team later joining HSBC, as
a director and Lead Banker in the bank's technology.
Team Chapel has overseen a number of Deals and provided
Finance for the likes of Music. Discovery platform Shazam.
Apartment rental provider, one find stay and more recently data
firm. Do you do well Chapel, you have
been in the Venture dead Market from pretty much the beginning.
What would you say are the biggest changes to the market?
You have observed over the last 10 years.
Good question. I think I'm pretty start with
the fact that there's more competition than there was.
Certainly a few years ago, which only shows the fact of the
market has expanded and grown Alongside that we probably up
greater amounts of funding the amount of interest in certainly
things areas such as software as a service technology as a whole
has meant that. There's been a few more bidding
wars than maybe there were a few years ago.
And pricing ultimately is coming a little as well.
So it's a little bit cheaper to get Venture debt.
Not saying it's cheap but it is cheaper and perhaps a little
less warrant Reliant and weren't driven as well.
So there are a few more creative organizations in the market that
are At it from maybe a different angle which I'm sure we can
explore later on CFOs and Venture Capital firms in
general. The now exploring this is an
option that the funding round as opposed to venture debt
potentially being really discussed as a, you know, as a
sort of bridging bridging facility and I think ultimately
as a product it's matured to attract.
Also clearinghouses, who are now obviously opening Venture debt
products and launching from there.
So I think, you know, I think from a market perspective Last
few years, some of the last ten years, the landscape has changed
dramatically. It's a, it's a, it's a
recognized products. Now, not just the sort of Niche
offering, and I think from a comparison back then, when it
was mainly a sort of American Products, it's very much UK
Centre now. Okay, great.
Well, thank you, a really good overview and I think, plenty,
that will jump onto later. I'm also joined by Josh Hawkins,
who's a partner too, often a schvitz with specialist
expertise. In Venture Capital Giles has
worked on a number of intracapsular and Venture debt
deals and his Client List includes.
Is the likes of local Globe, Mobius, Motors Cleo and Capone.
Yo, among many others. You will have a, you know, very
detailed overview of the Venture debt scene.
And you know how many credible players would you say are now
established in the space who are they, and is there room for four
more providers to come in? I know if you look at the UK
Market, there's only really handle of lenders.
Historically you know, that they were the big to which were
Silicon Valley Bank and grills capital and going way back when
yeah, there's ETV and Noble who've seen Since dropped out of
the market. But as we mentioned, the market
has matured and there are several other funds and banks of
intend to Market. So, as well as they can make
bank and cross, you have now have a designated funds, like
Colombia Lake, frog, boost, and then some banks, like yeah, like
Sherbrooke itself Clydesdale and yeah, what I can gather
listening to the market. Other other people are looking
to internet entering the market on top of that, then you have
u.s. providers. Like Triple point or Hercules
who dabble in the UK, their remit is pretty narrow.
So there's a limit to what they can actually do in the UK and
also, you know, the us such a big Market that the summer, when
it's so much low-hanging fruit there, then why my command of
honed? And we had true trying to look
at the UK Market. What will be interesting is
looking at develops in the u.s. you've got some clear blue
Ventures which is even more short-term debt a bit more like
discount factoring. It'd be interesting to see what
they do in the UK Market of anything.
Okay. I was really interesting and
clearly this is this is a market that is that is thriving and
growing really quickly, what we've had the overview and I
think we've set the scene, but the first question I really
wanted to dig into in more detail is how exactly taking on
debt can can benefit a start-up, I suppose, my assumption would
be that that sponsors and entrepreneurs wouldn't really
want to worry about, you know, servicing debt.
When the focus is on marketing, developing technology, grain
market, share green teams, Etc Giles.
Perhaps if I can put this one to you, what can a company that has
taken on its first series? A do with Venture debt?
That that maybe it couldn't do. If it didn't take on this
financing, a good question and I think the first thing to say is
just like Venture Capital Venture.
Debt isn't very company and just like Venture Capital.
There are risks and drawbacks on taking on benched at that said,
the internet can has some real advantages and used alongside
venture Really accelerated company's growth with minimal
did dilution to to ownership. So when you look at sort of how
can we say using it and how they can really accelerate their
growth, yeah that they're using Venture debts to supposed to
taking Equity from but feces they are growing their rounds or
increasing their rounds getting more money in using that debt to
then really accelerate growth. But again take a minimal minimal
delusion we're also seeing companies which will take on
debt in order to extend the runway that so they're looking
to hit some Milestones. They want to Kris value.
But then, at that point in time, now that doesn't make sense to
take Equity make sense to take that, prove the valuation and
then go out and raise money at a far greater valuation, but what
you don't see with ventured out. Yeah, it's not a product where
the company is at risk or in difficulties.
That's not a good time to take the internet.
It really is there to complement and accelerate Venture Capital.
The other thing that is interesting with ventured out,
is it enhances investor returns. Why a lot of VCS, like using
Venture debt is the fact that yeah, forever.
And they put in the next fifteen percent.
Now if that putting a pound in through Venture debt, that
doesn't impact their their solution that doesn't impact
their ownership. To the end of the day, they only
make money when the committee of sold or IPO, and they can
accelerate the kind of growth, it can grow a company far
quicker, far easier at no impact, all the on their dollar,
which is, you know, it really enhances their returns roll.
Some really interesting points as Charles mentioned there, what
is your take? If, you know, when you get that?
That question and And what do you sense that your clients are
wanting from from the product Union and service?
You're providing technical support, jobs is points.
There a spot on, I think just to quickly reiterate.
So few, those bullet points, I guess that I'll sort of expand
on, non dilution of shareholding.
Will ultimately create a more ultimately create more control
for the entrepreneur. Obviously, the extra cash Runway
is something that can really benefit.
It's also having an extra Finance partner companies taking
deaths at an earlier stage. Certainly, that is the norm in
the market. We know relatively speaking
versus clearinghouses and corporate loans shows
discipline. It shows a real statement to the
market. If you are a fast growing
company and you go out to Market and say look, we've also raised
debt. It really makes people look.
I think it's key. Also, to note, that Venture debt
isn't for everyone, as Giles said, but the key sort of
parameters around that I think are, it doesn't suit startups.
It doesn't suit pre-revenue companies.
And death in itself, still has to be repaid.
I'm a venture debt partner alongside a venture capital
provider creates a sort of bit more of a hand holding approach.
If there is a problem, we got more people to whilst it could
be more complicated to think of why we got so many people
involved actually an extra angle can often be very, very handy
and from a VC point of view, I think often instead of having to
maybe share the burden with another Equity provider, having
a, having a debt provider could unlock more money later on.
I think, I think also ensuring The market understands that
Venture debt is not a bridge, whilst it could be thought of as
something that gets you from A, to, B quicker, which it is, it's
not as Giles into that. It's not a, it's not something
to come in when the company's potentially having a difficult
time because ultimately, the last thing you want, when you're
struggling, is to find that, you've got another person who
may be lending or investing this, a need that money back.
So, I think key is, if it's, if it's used correctly, it can be
extremely Beneficial and lending alongside investors is the key
sort of parameter jars. How important then is the
sponsor as the, I guess the deciding factor, that that, that
would get the lenders on board. And also is this effectively is
the series, a sort of The Benchmark for when a company can
start looking at taking on the product doing this.
Second, part of a question, that's all.
First is series, a The Benchmark and then stuff is pretty know.
So, you know, sort of Silicon Valley Bank doubled at one stage
with a seed product, so you know, perform an institution
around, some cake. Some companies won't be ready
for Venture debt and series, a sum becomes may not be ready for
Senate adjourn until Thursday. So you see so really comes down
to the company itself. Its growth trajectory its plans,
its business model as to whether it makes sense to leverage it or
not looking at as to doesn't matter who the sponsor is, who
the investor is. Yes, it's very important.
Certain. Yeah, I mentioned earlier about
some us funds, so u.s. men like triple points its remit is that
if it goes into Europe it can only invest in Venture backed
companies within a certain band. So looking at the the indexes,
the axles, the world, it wouldn't be able to lend to any
is or a small seed fund and I'm sure we're well for a risk
profile when he's looking to company.
If there are some top tier of UCS, it changes, the mr.
Mannix they've done the DD, they are investment professionals,
they know the market, They've done the investment that lawyers
have been all over its, they've done the commercial DD and that
changes the risk profile quite dramatically, which means that
sort of any debt provider, some knows that opportunity.
Exhale have done that work. They know what they're doing and
yes, I could do my own ddiweddar get comfortable.
I'll get this to a risk but we can actually piggyback off the
work and the commitment that a top-tier fun has made really
interesting Johnson will is a lender's.
How do you, you know, what sort of parameters?
You sit with respect to what round the financing or what
round that the company is in and also how important is the
sponsor in your decision on whether to to do a lend or not.
So around the sponsor a lot of organizations in this market
have a sort of whitelist or a panel of feces or sponsors that
they will lend alongside we here at Sherbrooke.
Have a policy where we look at every deal and Its own Merit
that said we don't necessarily go with every single
transaction. We look at from a sponsor
perspective. We need to get comfortable with
that sponsor and the, I guess, the approach that they're taking
with the business. I think when it comes down to
looking at that a lot of its really, how long does this
sponsor or investor want to be part of the Journey of this
business? Are they looking to get out of
the next round? What we want is to lend
alongside people that are in it for the long run.
We need to be able to if there's a problem be able to find them
up and say is everything, okay? Just like the For now I would
would one would expect wish to phone up a VC or a p house
that's investing in them to ensure that they're aware of
any, you know, potential, a choppy water down the road.
So it's very important to ensure that there is an understanding I
think between sponsor and lender just like there is between
sponsor and borrow so investee. So I think it's, you know, I'm
happy to come to sort of things like, the structure of what we
would do and how we would do it shortly as well.
Yeah, well I think let's move on to that.
I'm, you know, I suppose we've we've gone through how start,
Sup can benefits and we've just touched on the points about
structure their will. So, you know, as a lender, how
do you get comfortable with with lending to a business that may
not be profitable yet and you know, how are you structuring
your loans? And maybe a bit more detail
about what you're looking for in a counterparty and that you've
sort of touched on some of those points now.
But perhaps, if you could just elaborate, absolutely.
So I think it's very, very important to establish a
difference between the debt and equity.
Part in this sort of instances. So normally a venture debt
provider and I'm talking about the whole Market here.
Would probably come in and around 33% of, maybe what the
equity provider is putting in simple maths.
If somebody's coming in with three million pounds from next
to perspective, the Lander would look at roughly around a million
as a sort of, Max sort of blend. So we look at it along that.
So those sort of lines, we don't want to land for longer than
about three years. I think Venture debt in itself
by definition is relatively At term, we look at companies that
have good strong Revenue base. So around a million Revenue
route, come. We hope to have the, an element
of recurring contracts in that million when it comes to whether
it's series a or series, b. As Joel said earlier on, I think
it totally depends on the, on the framework, the business
already has and the stage that they're at.
We have lent at series a, but we probably see the majority of
transactions coming at around the series.
B level. We look at some lending along.
Ending with potential covenants, potential warrants.
I mean, from our side we would like to keep an eye on how the
business is is doing by covenants.
I think we'd like to really call the monitors to ensure that the
company is not going vastly off track its budget with that in
mind. We look at maybe it's ebitda
position and its cash held or cash burn, but equally, we can
potentially go in with a less covenanted or monitor position
and take a take a small warrant as well.
And I think what we Talking about earlier at how, the
markets developed, I think pricing has come in, you know,
an awful lot since, since this product sort of came around
through a mixture of competition.
But I think also fairness I think entrepreneurs now can
actually look for a good transaction.
I think, what, what I've set up here at Sherbrooke, I think is,
is commercially very attractive to entrepreneurs and I think
also VCS are waking up to that too.
And as I said, also around the sponsors, we don't have to, we
don't have a specific panelist sponsors.
We learned along. Side, and we do like looking at.
Maybe the PE firms and feces that maybe haven't normally
traditionally sought Venture debt for their portfolio
companies. Because we'd like, you know,
we're open for business and we like to see what's out there.
Okay, really interesting. Well, I mean Giles, will put
some of your observations be I suppose you.
You see the whole markets and what structures are and lending
criteria. Do do You observe as it is a
relatively standard and boilerplate?
Or are we in a Market. Now, with a lot of the spoke
structures and lenders are quite differentiated in that respect
there. I think, when you look at the
market as a whole, that there aren't different products so
that, you know, straight facilities, working capital
lines, some sub mares financing. So there's a real Adventure as a
product is pretty flexible and different providers will have
different products which will appeal to different types of
companies. So that that's becoming more and
more interesting. And again, looking at the u.s.
we're going to see sort of new models, Well that's yeah they
some providers are providing you just marketing spend.
So you know they're giving you a limited facility just for Google
ads and some of my Facebook ads and that's it and no doubt will
come to UK before long. So you know that the product of
Olives as these companies with their different business models
of old. So that that's that's really
interesting but when it comes down to it, you know,
essentially look the market its, it tends to be either covenants
with no warrants or warrants and their covenants and that tends
to be be the deciding factor with a lot of these companies.
I mentioned earlier that, you know, and we'll do this.
Well, that's one of the benefits of a venture debt is at.
Yeah, it minimizes dilution but with a warrant yeah, that that
does yeah, Trent dilution minimal, but dilution, so it
really does come down to question is, do you?
Do you want to have that? That loan is very light but you
know, whether that ongoing monitoring from a provider or do
you want something a little bit, lighter touch and, but yeah,
that, that delete see further. One further thing to add just a,
just a, the question as well. When you're looking at.
So Partners a bit like the relationship between the
entrepreneur and the BC is of a marriage and absolutely a
partnership the same. It really is the same goes to
the, The Venture debt provider and the VC both want to know how
the other person is an act when it all goes wrong which is
really, really key. Yeah.
So well and his team want to know that you have will the
investiture and by that company and guy that can play through
the bad times just to be You see we want will another bench top
providers to know they have the support of their of their
lender? And so that's really important
and Trust throughout the entire VCB ecosystem is Biz key, I
think Behavior. Absolutely.
His jail cell behavior is so crucial.
If you ensure that you can provide a strong rational
approach when things are going badly just as you can, when
things are going well and as Joel said that you know the
ecosystem remembers, it just quickly jars just following up
on that. Is that has the market matured
enough to go through a cycle? Where the sponsors and the
lenders can tell who behaves and how they behave or is that still
to be revealed? I think still to be revealed.
So there are certain. Yeah, it's like muddy Bank.
Curry asked, they've gone through several Cycles.
Yes, of sending money back home. So you got the back license.
Really don't leave sort of recently, but we're lending into
Europe for yeah, for a couple of decades 30s.
Yeah, exactly. Exactly, same, but on the new
wave of Jerusalem out and we will I'll need to see how some
of these providers act when things go wrong with the next
downturn, which they will. How much does it come down to
individuals? Will because I suppose you've
been in the market for a long time.
So even though you with a different organization, it's
still the relationship with yourself that I guess people
rely on as much as they do the, the brand, absolutely, at people
in so many Industries. It's the same.
Its people by people and I think also, there's an understanding
and Trust for it some time in jail so many many years.
And, you know, I don't mean like to say we trust each other.
I think in terms of the The market as a whole, I would hope
that people remember me from transactions, a few years back.
And I've certainly seen that in the year that I've since I've
launched the shore break product, people have got in
touch and said, well remember you from this and and vice versa
also with some of the VCS and P houses and and also
entrepreneurs that maybe of sold companies that they may be
working with me on four, five years ago and they come back in
with new one. So I think I think that the
people the people side is absolutely crucial hinted
earlier also that management. Team in companies is super
important, just like the management team is in the
Landers and the VCS themselves. So as long as you believe that
you can work with that person, I mean it's all about trust that
the end really wanted to move on to a question about about the
awareness and provision of venture debts.
Giles, and know you mentioned earlier that the ecosystem has
developed and evolved and a lot more providers, the products lot
more sophisticated, but how educated would you Ivy c-czar
and indeed of entrepreneurs, are that Venture debt?
You know, are they familiar with what it is?
Who's providing it, how to get hold of it and also I suppose
how it can benefit them on their journey.
I think on the PC side, the top tier or the Silicon Valley style
be seized. Yep.
Understand. And use ventured out on a
regular basis. I think, looking at the tier
below becomes a bit warmer. Mix.
And what is interesting is that because of change the tax breaks
and although some regulatory issues, what we're seeing is
more competition or money, more money flowing into.
These are the tech space from non-traditional tech fans.
And those funds aren't that Savvy on the use of internet and
yes of I know Wilson has spoken with a number of them are but
I'll begin to realize here that the benefits of using it.
So you've got these new people coming in from the bottom, so
smaller funds. Yep, you speak.
Agnostic. But now looking more technology.
And then you're also looking at more sort of, yes, of low end PE
funds, which have their own sort of lending providers
historically. But now I begin to understand
and realize the benefits of using Venture debt so it's
evolving. I think.
Yeah, sort of the top and the market is well catered For and
has been for some while and known user punched out at the
bottom and it's changing with entrepreneurs.
Debt has a bad name in in Europe compared.
Yeah. Which is, which is wrong.
Yeah, so used like anything yet used improperly or unwisely, it
can damage or destroy value, but use well and he's properly.
It can really slow if you have increased value and looking at
the u.s. a lot of entrepreneurs over there.
Again, it's a far more mature ecosystem, far, happier to some
use debt as leverage as opposed to a lot of Europeans and save
Europe Ian's. This still is still this very
much. His mindset that is bad and if
I'm taking debt, I'm doing something wrong or the company's
going downhill. Now, that isn't the case is all
about managing resources and it's far cheaper and might find
more Capital efficient for some companies to take on debt than
others. An entrepreneur's are beginning
to understand this, but again, it's probably more of a mindset
issue, more than one other thing else, okay?
Really interesting. Love well, I mean, how do you,
how do you see it from from from the provider side?
And are most of the people, you you get in front of familiar.
About about what you're about or is there an education that you
have to sort of take them through?
There's definitely less education required than a few
years ago. Even a year ago, I mean, I do
have the occasional phone call where I have to explain, what
Venture debt is certainly certainly I'd say to to the
corporate finance Market that's certainly waking up to this.
Best example. I think in terms of the markets
developed is that the existence now.
Brokers, there are brokers in the Venture debt space, which
shows that when, when companies looking to borrow, There's
somebody out there that will help them package it and take it
to Providers, which certainly wasn't the case a couple of
years ago. I think also that sponsors are
now going in. Also to two companies saying,
we'd like to put x amount since your business.
And by the way, we also think that the following Venture debt
provider can come in with us. So, a lot of sponsors are going
in with a venture debt provider, almost not pre-approved.
But the discussions have been had already as opposed to really
historically, where Maybe A entrepreneur was thinking well,
we just raised some money. I'd rather not sell any more
shares. Let's let's go on Google and see
if anybody will end to us and it has actually really changed now,
where it is much more of a is much more of a sort of live
system, where and also CFOs talk to other CFOs, the amounts of
CFO networks that I've come across where see if I have one
company is recommended another CFO to me and just said, let you
speak. So well, he did this for us and
and Word of Mouth does get around and I think, you know,
from that side of things, the In the knowledge base out there is
better than ever and especially in sort of relatively turbulent
times. I think it will continue
growing. You know, I think so.
Just a sec. Okay something will also then on
children times that the message, we're getting from, a lot of
people in the market is that? Yeah, we don't know what will
happen the next year, 12 years time and yeah, we are being to
see an uptick in people looking at.
Then you start thinking, I don't raise money now because the
valuation isn't there. I don't know where I'd be able
to raise money in 12 months, six months time.
So again coming back to this point about extending the runway
but take advantage that now eating out growing the company
for the next 18 months and then yep.
Hopefully weathering what will be will be and then took going
out there and in some two years time to raise.
So yeah, we are sort of seeing more of a venture to as a safety
barrier which is which is interesting.
It's really good. And I think that leads us on to
the final question. I wanted to put you to you both
and I was just skiing for what your sensors are, what your
outlook is for the future of Venture debt provision in Europe
and also perhaps how, how the market will evolve and how
lenders will differentiate as a Zagros.
Indeed, as it has done, over the last few years and Charles.
Maybe if I could come to you first on that one, I think you
will see a conversion to between some of the fintech companies
and the Venture debt providers people like, world can have
instant access on a daily basis to cash flow is running through
these companies. So as the technology becomes,
More sophisticated as AI becomes more sophisticated, you will see
that's a blend between Fender understand and fintech.
Short-term lending is already, is already there in the US will
see more of that over here in the UK.
Overall the the sector will change from traditional banking.
It will take on cues from what we're seeing in terms of retail
fintech will be then applying to the corporate space.
Well, what is what is your outlook?
Where do you see the Mark again? Well, it's buoyant it's growing
and I would say that but it really it really is.
I think Charles is points of spot on on the fintech side
disruption is completely all over this Market anyway and will
continue to be. I think there's certainly an
opportunity for growth in Europe in the coming years.
I think. Flexibility in terms of offering
is key. I think we've hinted a lot in
this in this in sort of session around providers in the Venture
debt space saying warrants or all covenants.
And I think having a the ability to be able to sort of move and
shift between both of those sort of areas is Is is going to be
very important. I think also improved execution
delivery and reliability in the market.
I think there's been a, there's been a lot said, over the last
few years. Certainly the Venture that space
around how long it takes to get something done.
I think it's vital to be able to act quickly.
These companies don't want to sit there with Reams and
massive, huge documents full of paperwork.
They have to complete, they wanted to be quite slick.
And I think that's something that certainly gonna have to
improve. And has improved jobs hinted
around the zero thing. I think data scraping and
General is certainly helping. I think companies that are able
to make that execution part quicker in terms of sort of data
and Dee Dee that's going to be a very important part.
I think look I think in terms of an overlooked overview in
general, this is a growing Market that continues to grow
and I think we'd London being relatively speaking, you wash
with cash still certainly in the VC side.
There is a real real demand for this product and I think it's
only going to go one way, right? And I think on that note will
Chapel Charles Hawkins. Thank you very much.
Thank you. Goodbye.