Are alternative financing solutions the ideal method for tech startups to consider?

Written by Louis-Tchine Pickering, Director of Research

Throughout this year, there has been a sharp decline in venture capital dealmaking, falling 42% between January to November 2022 compared to 2021. This is caused by dropping tech stocks and startup valuations due to the lack of cash flow caused by macroeconomic uncertainty.

Some startup founders are looking into debt-focused deals- notably Structured Equity, Convertible Notes, and more to solve this. For instance, Arctic Wolf, a $4.3 billion cyber security company backed by Owl Rock Capital, raised a $400 million Convertible Note in October (double its largest equity financing). This comes with a conversion premium, where the lenders could convert their loans into shares at a higher price than the eventual IPO.

This may seem like a suitable alternative to traditional investing, but it assumes that stock prices will rise and meet valuation levels set in the past decade. I believe this showcases the reluctance to discuss valuation levels as it would damage the projects planned for the startups and reduce the level of return for investors. This, in turn, does not benefit either party as the macroeconomic environment is not representative of the valuation scales and could fail as borrowing costs still increase.

Valuations of tech startups recent times are significantly lower (FT.com, 2022)