Venture debt is reshaping capital flows through technology startup ecosystems, according to new international research analysing funding patterns across 59 countries between 2015 and 2024.
The study, published in the International Review of Economics and Finance by researchers from Edinburgh Business School at Heriot-Watt University, found that greater venture debt availability is associated with lower early-stage equity funding, higher late-stage equity funding, and a positive overall effect on the total capital available to startups.
The research argues that venture debt should not be treated as a passive supplement to equity. Used appropriately, it can alter the way innovation ecosystems allocate capital between early growth and later scale-up.
Dr David Dekker, research fellow at Edinburgh Business School, Heriot-Watt University, who led the study, said: “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. It extends runway, gives firms more time to reach stronger milestones and can help them return to the equity market from a better position.”
He added: “Venture debt is a crucial component of the financial landscape for tech startups, especially as they navigate the ‘valley of death’, that difficult phase between initial growth and securing the next round of funding. This study shows how venture debt doesn’t just fill a gap but rather increases the efficiency of ecosystems by enabling startups to grow beyond the early-stage funding limits, ultimately accelerating their progress towards becoming successful companies.”
The study found that for every unit of venture debt introduced into a country’s ecosystem, early-stage equity investment decreases by approximately twice that amount, while late-stage equity funding increases by four times the venture debt introduced. The aggregate effect on total startup capital is positive, suggesting that venture debt can improve the efficiency of funding systems.
Professor Dimitris Christopoulos, former director of research at Edinburgh Business School and Heriot-Watt University’s School of Social Sciences, co-authored the findings. He said: “Greater access to venture debt is associated with more late-stage capital, suggesting it can improve ecosystem effectiveness and help startups bridge to scale-up.”
The findings are particularly relevant to the UK, where the scale-up funding gap remains a persistent concern. British startups have often been strong at early-stage innovation but weaker at retaining high-growth companies through later funding rounds, with overseas investors frequently playing a larger role as companies mature.
Venture debt can help founders avoid excessive dilution when they need additional runway but are not ready, or do not want, to raise another equity round. That can be valuable when a business is close to reaching revenue, product, regulatory, or market milestones that may support a higher valuation. Used well, debt can strengthen a company’s position before its next equity raise.
The instrument also carries risk. Debt must be serviced, and unsuitable use can increase pressure on companies whose revenue is uncertain or whose growth assumptions weaken. Venture debt is therefore more appropriate for startups with credible growth plans, investor backing, and a clear route to follow-on capital than for companies trying to replace patient early equity.
The study notes that the effect differs between mature and emerging ecosystems. In developed markets, venture debt can complement equity and support scale-up financing. In emerging markets, where early-stage capital may already be scarce, venture debt can crowd out critical early equity if not carefully designed. That distinction matters for policymakers trying to widen access to startup finance without weakening the earliest stages of company formation.
The UK government has already moved to expand the Enterprise Investment Scheme and Venture Capital Trusts, while increasing the permanent financial capacity of the British Business Bank. The research suggests that startup finance policy needs to consider the full funding ladder: seed equity, early venture capital, venture debt, late-stage equity, and scale-up finance.
Dr Dekker said: “The diversity in financing instruments really seems to help the effectiveness of the ecosystem. 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.”
The study points to matching schemes, seed co-investment vehicles, partial loan guarantees, co-lending, and targeted guarantee schemes as possible policy tools. Startup finance cannot rely on one instrument alone. Innovation ecosystems need enough equity to create companies and enough flexible capital to help them scale without losing momentum at the funding gap.
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