INTRODUCTION Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
comes to terms growth companies can demand from investors. Fewer exits, lackluster distributions Growth companies continue to face significant challenges with their exit strategies, placing substantial strain on sales processes for busi - nesses. Globally, 2024 saw a total of 8,397 M&A exits (compared to 8,529 in 2023) and 355 IPOs (compared to 444 in 2023). The European market continued to suffer, with 3,472 M&A exits in 2024 (substantially flat from 2023 levels) and 42 IPOs (down from 52 in 2023), while the US likewise felt the impact with 3,055 M&A exits in 2024 vs 3,167 in 2023 and 71 IPOs (up from 65 in 2023). On average, from the time of first funding to IPO, it took VC backed companies that went public in 2024 two years longer than in 2022 – a median of 7.5 years. In light of the quadrupling of active venture/ growth investors during the past decade as well as the massive decline in VC distributions in 2022 and 2023, which has not been seen at this level since the global financial crisis, distribu - tions remained significantly below the ten-year average in 2024 but indicate a slight increase for 2025. Alternative financing structures Overall, declining valuations and rocky exit path - ways have prompted demand for alternative transaction structures and financing solutions, which have provided a counterpoint to turbulent markets. At the same time, venture debt corre - lates with overall funding conditions, as equity funding tends to constitute a growth company’s primary repayment source. Non-dilutive measures With VC backing becoming both scarcer and more costly, start-ups are eyeing non-dilutive
financing options as a viable alternative. In 2023, non-dilutive funding for European start- ups increased by 50% compared with the previ - ous year. Unlike venture debt, which may include equity warrants, non-dilutive financing options include revenue-based financing and term loans. While most growth companies continue to prefer external equity financing in order to drive rapid growth, current market conditions have spurred a search for tailored alternative structures. Bridge rounds Venture capitalists have increasingly turned to bridge rounds (typically led by, or confined to, existing investors) in order to support their port - folio companies rather than following through with new investment rounds with terms deemed insufficiently attractive. The tendency was par - ticularly discernible among late-stage start-ups, where valuation levels had decreased most sig - nificantly. The surge in bridge rounds among early stage start-ups follows an initial period of more favourable capital raising conditions com - pared to late-stage companies. Bridge rounds were oftentimes combined with a structured ele - ment to partially provide liquidity for secondary shares. With growth companies running low on cash, a need to raise funds in a compressed timeframe contributed to existing market pressures. Shift - ing dynamics have led to an altered transactional practice not seen in nearly a decade: venture firms’ enhanced negotiation leverage has per - mitted more investor-friendly terms, including more sizeable equity stakes and increased or cumulative dividend rights (guaranteed returns such as compounding interests as part of the liquidation preference owed to shareholders, irrespective of the company’s financial perfor - Ramifications of trends in deal terms Deal terms reflect a shifting market
9
CHAMBERS.COM
Powered by FlippingBook