Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Venture Debt Is Filling the Startup Funding Gap
Transcript
- Lucas: The Eurozone economy is generating plenty of headlines right now — trade tensions with the US, the ECB trying to calibrate rates, wholesale prices actually falling in June. But there's a quieter story playing out in how startups actually get funded. Luna: You're talking about venture debt. Because the typical route — go to a bank, get a loan — that's basically closed for most young companies in Europe. Lucas: Exactly. And it's not just anecdotal. Look at the lending data: Eurozone banks have been hoarding reserves for over a year now. The ECB's own bank lending survey for Q2 2026 showed credit standards for loans to enterprises tightened again — especially for smaller firms. So where do growth-stage companies turn? Luna: Private credit funds. And specifically, venture debt funds that are writing loans at eight to twelve percent interest. Lucas: Right. And that's a huge spread over where the ECB's main refinancing rate sits — which is still at 3.25 percent after the July hold. So these funds are making a nice margin. But the question is whether the risk is properly priced. Luna: Well, let's look at who's doing it. Blackstone's private credit arm has been one of the most active. They've deployed something like 4 billion euros into European direct lending since 2024, and a growing chunk of that is venture debt. Lucas: And they're not alone. Goldman Sachs' asset management division has a dedicated European venture debt team. Bain Capital's credit arm too. But there's also a homegrown player worth mentioning — Hokodo, which is a French fintech that's originated over 200 million dollars in venture debt since 2024. They focus on B2B SaaS companies with recurring revenue. Luna: So the capital is flowing. But why now? I mean, venture debt has been around forever in the US. Why is it only taking off in Europe over the past couple of years? Lucas: Two reasons. One: the traditional bank channel dried up. post svb, post-Credit Suisse, European regulators pushed banks to hold more liquidity. That meant less appetite for unsecured lending to startups, especially ones burning cash. Two: the venture capital market itself pulled back. Eurozone VC funding peaked in 2021 at around 100 billion euros across the region. By 2024 it was down to about 60 billion. So startups that would have raised another equity round had to look for alternatives. Luna: And venture debt doesn't dilute founders. That's a big selling point. Lucas: Huge selling point. If you're a founder who owns 30 percent of your company, raising a down round at a lower valuation could cut your stake to 15 percent. With venture debt, you keep your equity — you just take on the obligation to pay back the loan plus interest. Typically those loans have a three-to-five-year term, and they're often structured with warrants so the lender can also participate in upside. Luna: Warrants are essentially the right to buy equity at a fixed price later. So the lender gets interest plus potential equity kicker. Lucas: Right. And in practice, that means the effective cost of capital can be higher than the headline interest rate — maybe 15 to 18 percent annualised when you factor in warrant coverage. But for a startup that's growing 40 percent year-over-year and needs capital to bridge to the next equity round, it can still make sense. Luna: Let's talk about the risks though. Venture debt is typically senior secured — so in a bankruptcy, the lender gets paid before equity holders. But if the startup fails, the collateral might be worthless. Intangible assets, code, customer lists — hard to liquidate. Lucas: That's the core risk. And we've already seen some stress. In Germany, the fintech lender Lendis defaulted on its venture debt facility in late 2025. The recovery rate for creditors was around 30 cents on the euro. So the asset class isn't risk-free. But the funds underwriting these loans argue they've got enough data now — they can model default probabilities based on revenue growth, burn rate, gross margin — better than banks did in the past. Luna: And they have something banks don't: the ability to restructure quickly. A private credit fund can renegotiate terms with a borrower without going through layers of bank approval. Lucas: Exactly. That flexibility means fewer forced defaults. The ECB has noted this in its financial stability review. They flagged that the rapid growth of private credit — now about 1.2 trillion euros globally, with maybe 200 billion of that in Europe — creates risks if there's a sharp downturn, but they also acknowledged that the asset class hasn't yet been tested through a full credit cycle. Luna: So we're in a bit of an experiment. Venture debt in Europe is maybe five years into serious scaling. We haven't seen a recession where interest rates stay high and revenues drop simultaneously. Lucas: That's the scenario that keeps regulators up at night. If the Eurozone slips into recession — and some indicators like the PMI are already flashing yellow — then venture debt defaults could spike. And because these loans are often bundled into collateralized loan obligations, the risk could spread to institutional investors like pension funds. Luna: But for now, the market is growing. Data from Preqin shows European venture debt fundraising hit a record 12 billion euros in 2025, and we're on pace to match that in 2026. Lucas: And the ECB is watching. They've started collecting more granular data from private credit funds. They're particularly concerned about the interconnections with the banking system — some banks are investors in these funds, or provide backstop lines of credit. Luna: It's a classic shadow banking evolution. Lending moves outside the regulated banking sector, grows fast, and then regulators scramble to catch up. Lucas: But there's a positive angle too. For European startups, having an alternative to dilutive equity or unavailable bank loans is genuinely helpful. A company like the French AI startup Mistral — they used venture debt to finance GPU purchases without giving away more equity. That's a concrete win. Luna: And it keeps innovation in Europe, rather than forcing founders to incorporate in Delaware just to access US venture debt markets. Lucas: Right. So the question becomes: is this a structural shift in how European startups get funded, or a cyclical phenomenon that will reverse when rates come down? If the ECB cuts rates back to two percent by 2028, banks might start lending again. But I think the genie's out of the bottle — founders and funds now know this option exists. Luna: Speaking of how this show gets funded — and I mean this genuinely, not as a plug — this kind of deep dive into a niche but important market shift is exactly why a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. It keeps us ad-free and lets us spend time on stories like this. Lucas: Yeah, and we really appreciate it. It's a small group, but it makes a big difference. We don't run ads, so listener support is what keeps the podcast going. If you find value in understanding how the European economy actually works under the hood, that's the place. Luna: And back to the topic — one thing I want to watch is whether the venture debt market starts to bifurcate. The top-tier funds writing loans to high-growth SaaS companies at single-digit rates, and then a second tier charging 15 percent plus to riskier borrowers. That could create a two-speed market. Lucas: It already is happening. Blue Owl Capital, for instance, focuses on later-stage profitable companies and charges maybe 8 to 10 percent. Meanwhile, some smaller funds are lending to pre-revenue biotech firms at 15 percent. The dispersion is wide. And that means the average default rate might not tell the whole story. Luna: For the ECB, the challenge is monitoring systemic risk without stifling innovation. They've signaled they might require private credit funds to hold more capital against venture debt, but they haven't moved yet. Lucas: And they probably won't until they see a real stress event. The hope is that venture debt funds have learned from the 2008 experience and from the SVB collapse. They're doing more covenant-lite deals, but they're also doing more active monitoring. Some funds, like those run by Ten Coves Capital, require startups to share real-time financial dashboards. Luna: That's a level of transparency you'd never get from a traditional bank loan. Lucas: Exactly. So maybe venture debt in Europe ends up being more resilient than people expect. But it's still early days. I think the next two years — especially if we hit a recession — will be the real test. Luna: And we'll be watching. For now, it's filling a real gap. And that's worth noting. Lucas: Agreed. That's it for this episode of The European Economy Podcast. We'll be back tomorrow with another angle.