Study finds venture debt shifts startup funding toward later rounds
Research across 59 countries links venture debt to less early equity, more late-stage capital and a net gain in startup funding.
By Tom Brennan · Health & Medicine Correspondent
3 min read
Venture debt is changing how technology startups raise money between funding rounds, according to new research from Edinburgh Business School at Heriot-Watt University. The study matters for startup policy because it finds the loan-style financing can expand total capital available to young tech firms, while also putting pressure on early-stage equity in some markets.
The paper, published in the International Review of Economics and Finance, examined startup financing across 59 countries from 2015 to 2024. Heriot-Watt University said the authors used data that included 15 countries with comprehensive venture debt records.
Venture debt is typically used by startups that have already raised equity and need more time or capital before their next priced investment round. The researchers argue it should be treated as an active financing tool in startup ecosystems, rather than a secondary add-on to venture capital.
Debt fills the gap between startup stages
Dr. David Dekker, a research fellow at Edinburgh Business School who led the study, said venture debt can help companies extend their runway and reach stronger milestones before returning to equity investors. Heriot-Watt University said the study frames the financing as especially relevant during the difficult period between early growth and the next major funding round.
The research found a clear pattern across countries. For each unit of venture debt added to a national startup ecosystem, early-stage equity investment fell by roughly twice that amount, while late-stage equity investment rose by about four times the amount of venture debt introduced, according to Heriot-Watt University.
The authors said the combined effect was positive for total startup capital. Professor Dimitris Christopoulos, a co-author and former director of research at Edinburgh Business School and Heriot-Watt University’s School of Social Sciences, said greater venture debt access was associated with more late-stage capital and could help startups move toward scale-up financing.
The findings suggest venture debt can help companies avoid taking additional early equity when they prefer not to dilute ownership further, Heriot-Watt University said. By giving startups more time to grow before raising later-stage equity, the study says the tool can improve the flow of companies through the innovation pipeline.
Policy risks differ by market
The authors also warn that the effects are not uniform across countries. In more mature startup markets, Heriot-Watt University said venture debt appears to complement equity financing, particularly for scale-ups that need capital after early rounds.
In emerging ecosystems, the study says venture debt can have an unintended downside if it displaces scarce early-stage equity. The authors argue that policymakers should protect seed and early-stage investment channels while using debt tools to support later-stage growth.
The U.K. receives particular attention in the findings. Heriot-Watt University said the country’s late-stage funding gap has contributed to more overseas participation in growth rounds, creating pressure for domestic companies seeking scale-up capital.
The university noted that the U.K. government has moved to double the amount companies can raise through the Enterprise Investment Scheme and Venture Capital Trusts, with the measures expected to support about £100 million in additional annual investment. It also said the British Business Bank’s permanent financial capacity has been increased to £25.6 billion.
The researchers said those efforts could be reinforced by stronger safeguards for early-stage equity. Their policy recommendations include matching schemes, seed co-investment vehicles and partial loan guarantees in emerging markets, along with co-lending and targeted guarantees for scale-ups in more developed markets.
The study used a Panel Vector Autoregression model to examine links between funding instruments over time. Heriot-Watt University said the analysis controlled for national factors including knowledge intensity, economic development and political stability.
This story draws on original reporting from Phys.org.