How venture debt is enhancing the start-up landscape

How venture debt is enhancing the start-up landscape

Technology is quickly becoming one of Australia’s most important sectors. As of 2023, it is our third largest industry, and is projected to account for 13% of GDP by 2030, at AUD$250 billion. What’s more, Australia’s technology scene is home to some of the world’s biggest start-up success stories, with names like Atlassian and Canva launching their successful growth stories from our shores. Now, Australia is the fourth largest start-up hub in the APAC region.

Recently though, the industry has encountered some growing pains, with start-ups struggling to secure finance as investors navigate shifting economic sands and exercise more caution when deploying capital.

The Venture debt landscape

These funding challenges are exacerbated by the state of Australia’s venture debt market, which is nascent and highly fragmented. Venture debt has not traditionally been a common funding instrument for Australian tech startups and scaleups seeking growth capital.

Fundamentally, venture debt is a form of senior debt financing accessible by venture capital backed growth companies, which lack the assets or historic cash flows required for traditional debt financing. Generally, venture debt financing is structured as a term loan or revolver and offers a range of payment options. The loan facility can also include purchase rights for company stock, granting the lender a share of the financial upside if a company’s equity investors decide to sell their stake.

Compared with the US and Europe, the infancy of Australia’s venture debt market, coupled with the abundance of equity capital raised and deployed between 2019-2022, means that venture debt makes up only a small percentage of the capital in circulation across venture capital backed companies.

Despite a slowdown in the IPO market post-COVID – ASX figures show IPOs dropped from 241 in calendar year 2021 to 107 in 2022¹ – and the collapse of several tech lenders in early 2023, venture debt has re-emerged as a viable option for founders and their advisors, providing a wider range of strategies to navigate the lifecycle from seed to scaleup, and beyond.

HSBC’s role in the technology and innovation ecosystem

Venture debt is a specific area of expertise for HSBC. With years of experience working with later-stage technology companies, we are now expanding our support of start-up companies. Recently, HSBC announced the expansion of our HSBC Innovation Banking division, launching a venture debt offering in the U.S. to support companies from Series A through to highly complex multi-national businesses.

From October, HSBC will introduce its venture debt offering to Australia. As the leading international bank for innovative companies around the world, the introduction of our Venture Debt solution will increase the specialised support we provide to innovative local companies who need flexible, long-term, and trusted banking relationships to help them reach their next milestone or capitalise on opportunities as they arise. Initially focused in later stage growth companies, clients can also access a range of APIs and digital payment solutions, the award winning HSBCnet digital platform, and digital onboarding.