In the face of the funding crunch that technology has been facing in recent months, startups are all struggling to survive. But not everyone has the same options. While the younger, less well-funded ones are looking to sell out, the more mature, scale-ups are turning more to debt. “We have more and more mandates to increase the debt. They are scale-ups that want to continue to finance their growth by being more attentive to their profitability profile”, confirms Philippe Englebert, manager of Lazard.
Same observation on the side of Goldman Sachs in France. “Sometimes, we start a capital raising process with startups and finish or complement it with debt or hybrid instruments”, says Guillaume Amar, technology manager at the American bank in France.
Two categories of start-ups emerge: those that cannot raise funds and go into debt, and those that directly consider the possibility of taking out a loan. “They know how to adjust growth according to market conditions and can bet on financing. They are digital ETIs”, says Paul-François Fournier, executive director of the innovation department at Bpifrance.
Malt, the link between freelancers and companies, has a debt of 40 million euros. “Equity is more complicated and increasingly expensive. The debt constitutes an additional lever of financing and gives flexibility to carry out acquisitions”, underlines Alexandre Fretti, co-CEO of Young Shoot, which raised 80 million euros in June 2021.
Lenders are on your side very demanding. “We are contacted by many banks, mainly French and British”, says Benjamin Gaignault, co-founder and CEO of Ornikar, the online driving school, which guarantees not to seek financing for the moment. “Let’s see if conditions remain less comfortable,” he adds.
Malt, for his part, salutes the proactivity of French banks, which have not always been big followings of French Tech. “They are slow in their decision-making processes, but they are all equipped with devices for scale-ups, to be more efficient and to be at the service of the ecosystem”, emphasizes Alexandre Fretti. “French banks have acquired a lot of maturity. They now have specialized teams. This is a sign that we have created a new digital sector”, adds Paul-François Fournier.
American banks are also on the offensive. According to our information, JP Morgan hosted a dinner this week with handpicked French tech entrepreneurs. As they enter through the debt window, banks are also planning a very specific deadline: the IPO.
Software is the best candidate
Another type of player is also chasing French scale-ups: debt specialists. American Sixth Street, which was surveyed by Contentsquare last summer, is one of them. But also more general players like BlackRock. “These debt investors are very sophisticated, they are used to looking at this type of file. They have a strong education on the notion of profitability and cash flow generation. They speak a language that appeals to founders looking to shop on the runway [de la trésorerie, NDLR] and who don’t bet everything on growth”, stresses Guillaume Amar.
These players specialize in “ARR funding”, meaning they lend an amount based on the ARR, the annual recurring revenue, the leading metric in the world of subscription software (“SaaS”). “SaaS ticks all the right boxes for debt: they have strong growth profiles, they have recurring revenues and a clearer path for which it’s quite simple for them to get profitable”, stresses Guillaume Amar. “Not all startups are eligible. You need a minimum of recurrence and/or profitable deals where you stick the debt”, says another banker.
For riskier and younger profiles, there remains the “risk debt”, a tool not very developed in France. “Risk debt is a tool that can be interesting, especially in times of crisis. But it is mechanically more expensive because the risk of sitting down is greater. It must be handled with care, ”warns Paul-François Fournier.
The Frenchman Isai launched himself into this niche at the beginning of the school year with a first closing of 40 million euros. It is aimed at young companies with a strong turnover growth of at least EUR 4 million and which are on the way to becoming profitable or are already profitable. More generalist players are also starting to get into debt in the technology sector such as Blackstone (880 billion dollars under management) which will invest at least 2 billion dollars in the form of debt in start-ups, in the development phase. IPO and post-IPO. According to PitchBook, the values granted in “venture debt” in the United States increased from 4.4 billion dollars in 2010 to 33 billion in 2021.