Debt is estimated to make up about 15% of the total equity invested each year in US venture capital deals, whereas in Europe it reached a peak of 5.8% in 2007, according to research by trade body the British Private Equity and Venture Capital Association (BVCA), and it is rarer still in the rest of the world.
Introduced initially in the US in the 1960s as leasing – lending money to buy specific assets as collateral against the loans – venture debt has since expanded to include working capital, credit cards and overdrafts for both nascent companies and venture capital firms.
The amount lent, primarily to healthcare and technology companies, has been cyclical and followed the overall state of the stock markets.
The firms lending tend to be specialised lenders or property agents rather than commercial banks.
The biggest is Silicon Valley Bank (SVB), which over the past 25 years has lent to about half of US VC-backed start-ups, such as social messaging company Twitter, has investments in 437 VC funds and more than 500 VC firms as clients.
However, the biggest public deal recently was by TriplePoint Capital, which lent $100m to social media company Facebook in 2008, on top of the $30m it had provided earlier.
The availability of debt financing is also an important sign of a venture market’s maturity.
All Europe’s venture lenders, ETV, Kreos, Noble, Lloyds Banking Group and SVB, are based in London, from where nearly £1bn has been lent to 538 companies across Europe between 1999 and 2009, according to the BVCA.
Philip Cox, head of UK, Europe and Israel at SVB Financial Group UK, said it had just applied to the UK regulators for a
banking licence to provide the wider range of services, such as current and deposit-taking accounts and credit cards, seen in the US.
Cox, who joined from Lloyds last August, said: "It will be a competitive advantage for us to be a full-service bank in Europe as our competitors in the venture lending space are fund based. We have a relational proposition to start-ups, with dedicated relationship managers and personal client service staff compared with the UK high-street call centre proposition for those up to £250,000."
He said the aim in Europe was to do in five years what SVB had taken 25 years
to achieve in the US. This meant backing 100 to 150 companies a year for businesses with intellectual property at their heart.
However, Cox warned: "In the US, venturing is about building great companies. In Europe, it is about the financing, so less money is put in.
"It is drip fed and there is a huge drama if things do not go to plan, which consumes the chief executive’s time and is wearing psychologically."