The venture capital landscape remains challenging, with many weak startups funded during 2020 and 2021 facing failure, and predictions suggest that more will collapse in 2025.
Similarly, Convoy, a digital freight company, encountered financial troubles in late 2023, resulting in Hercules Capital taking control to recover its investments.
When acquisitions are forced by lenders, equity investors often find themselves unable to recover their investments, as debt holders take precedence during liquidation events.
This trend follows a record $41 billion in venture debt across 2,339 deals in 2021, indicating an increasing reliance on borrowed capital within the startup ecosystem.
While venture debt can provide essential cash flow for startups, it also heightens the risk of forced sales or foreclosure if repayment terms are not satisfied.
Divvy Homes had previously borrowed $735 million from various financial institutions in 2021, complicating the financial outcomes of the sale for its shareholders.
Despite these risks, venture debt remains appealing, with new issuance reaching a decade-high of $53.3 billion in 2024, primarily directed toward AI companies like CoreWeave and OpenAI.
Lenders are currently grappling with numerous troubled companies in their portfolios, resulting in a cautious approach toward further investments in slow-growing startups.
Investors are increasingly hesitant to fund slow-growing startups that fail to justify their previously high valuations, leading to a bleak outlook for many unicorns.
David Spreng, CEO of Runway Growth Capital, has raised alarms that numerous companies are nearing their operational limits, prompting lenders to advocate for sales to mitigate potential losses.
The accounting startup Bench exemplifies this trend, having failed in December 2024 after lenders called in the company's loan, leaving thousands of businesses without access to their financial documents.
In the realm of acquisitions, Divvy Homes was sold for approximately $1 billion to Brookfield Properties; however, some shareholders may not receive payouts due to the company's significant debt obligations.
