Is venture debt the key to surviving the funding gap?
Venture debt is reshaping how capital flows through startup ecosystems worldwide, acting as a crucial bridge between early-stage and late-stage investment rounds.
New research published in the International Review of Economics and Finance by academics at Edinburgh Business School, Heriot-Watt University, is the first to compare venture debt’s influence on equity funding across multiple countries. Analysing data from 59 nations between 2015 and 2024, the authors found that greater venture debt availability is linked to lower early-stage equity investment, significantly higher late-stage equity funding, and an overall increase in the total pool of capital available to startups.
For every unit of venture debt introduced into a country’s startup ecosystem, early-stage equity investment falls by roughly twice that amount, while late-stage equity funding rises by four times as much. The net impact is positive, as researchers suggest venture debt makes startup finance more efficient, rather than merely redistributing existing capital.
Dr David Dekker, a research fellow at Edinburgh Business School who led the study, described the dynamic using a simple analogy: “Think of a bridge across a ravine. Early equity helps a startup reach its first ledge. Venture debt can then help it cross the difficult gap to the next, higher stage without immediately raising another equity round.”
The UK dimension
For the UK in particular, the findings carry weight, as a persistent late-stage funding gap has pushed many growth-stage businesses to seek scaleup capital from overseas investors. The government is attempting to address this by doubling the amount companies can raise through the Enterprise Investment Scheme and Venture Capital Trusts, which is expected to unlock around £100 million in additional investment annually, and by expanding the British Business Bank’s permanent financial capacity to £25.6 billion.
However, the study’s authors warn that stimulating late-stage investment is only half the equation. Those efforts, they argue, need to be matched by equally strong protections for early-stage equity pipelines, or the structural problem simply shifts rather than resolves.
A different picture in developing markets
The picture is more complicated in emerging markets. Where early-stage funding is already scarce, the researchers found that venture debt can unconsciously crowd out the seed and early investment that young companies depend on, potentially weakening the innovation ecosystem it is meant to support.
Professor Dimitris Christopoulos, co-author of the study, said the findings point to a broader lesson about the value of financial diversity: “Greater access to venture debt is associated with more late-stage capital, suggesting it can improve ecosystem effectiveness and help startups bridge to scaleup.”
What policy makers should do
The paper urges policymakers to take a nuanced approach by using matching schemes, seed co-investment vehicles, and partial loan guarantees to protect early-stage pipelines in developing markets, while deploying co-lending and targeted guarantees to support scaleups in more mature ones. It also stresses that any venture debt support should come with conditions ensuring access to follow-on funding and hands-on guidance that early-stage companies so often need.
“The diversity in financing instruments really seems to help the effectiveness of the ecosystem,” Dekker said. “More diverse capital sources lead to more successful startups, increasing the number of high-value companies, including unicorns, that will drive future economic growth and employment.”
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