As startup valuations tighten, OneVentures is hailing its new ‘venture credit’ fund and $15 million loans

As startup funding rounds tumble in size and frequency, venture capital firm OneVentures is championing its new venture credit fund as a way for founders to access much-needed capital without losing equity up-front, or risking a funding round when company valuations are compressed.

The problem: not enough local market participants are aware venture credit even exists, OneVentures says, potentially excluding firms from funding they could use to build company valuation ahead of a traditional funding round, or extending the runway of the capital they already have.

OneVentures launched Australia’s first venture credit fund in 2019, offering debt funding to startups unlikely to be serviced by the traditional banking sector.

Targeting firms with proven revenue growth, its venture credit model offered loans of between $500,000 and $5 million, payable with interest rates in the low double digits over 3-4 years.

While those rates are significant, OneVentures pitched the product as a saving in the longrun for some founders, saying it could reduce pressure on company leaders to dilute their shareholding earlier in their company’s lifecycle when valuations are smaller.

In return, its venture credit terms also place a OneVentures representative onto the company board as an observer without voting rights. Some equity options are also packaged in the loan agreement in case of certain company milestones.

Loan size grows in OneVentures’ new venture credit fund

Investor interest in that $80 million fund led to the creation of a second fund in April this year, with OneVentures initially seeking $150 million to power its venture credit plans.

Speaking to reporters on Wednesday, Michelle Deaker, managing partner of OneVentures, said the firm is now thinking even bigger for its latest venture credit product.

Beyond the $5 million top end of its first venture credit fund, the new offering intends to provide loans of between $5 million and $15 million.

But Australian market awareness of the product is still lagging behind the US, where venture credit is a mature element of the startup ecosystem, the firm claimed.

Between 2% and 4% of Australian venture funding is tied up in venture credit, compared to between 15% and 20% in the US, OneVentures said.

According to data collected by the firm, 40% of Australian founders said they did not take venture credit in 2021 because they simply weren’t aware it was an option, while 20% said they were unaware of how venture credit operates.

Comparatively, investors were more likely than founders, employees, and board members to report a good understanding of venture credit across the board when compared with founders and employees or board members.

Some 73% of investors said they were likely to recommend venture credit to a portfolio company in the future.

Partner Nick Gainsley, who was pulled from European growth debt giant Kreos Capital to run OneVenture’s latest venture credit fund, said trust was vital to expand the product’s reach in Australia.

Unlike banks lenders, “as a counterparty, we’re flexible”, he said, with OneVentures offering loan covenants applicable to each borrower’s unique circumstances.

OneVentures wants to build a “relationship” with firms which take on debt, he added, claiming firms which take on venture credit are happy to have OneVenture observers sitting on their board to provide insight and guidance.