Banks Want to Bet on Startups’ Debt, but Equity Investors May Be Wary

Itaú has $57 million to invest in venture debt for early-stage startups, but for General Atlantic, taking on debt requires caution

In this separate venture debt structure, Itaú has BRL 300 million to allocate to startups by the end of this year, with the idea of investing in smaller tickets from companies at an earlier stage.
September 16, 2022 | 07:22 AM

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Bloomberg Línea — In Latin America, Series C rounds onwards have seen a significant downward adjustment in the first half of this year compared to the same period last year, according to LAVCA (Latin American Private Equity Investment Association). To the detriment of equity rounds, some startups are financing themselves through debt, with lines of credit, or so-called venture debt, a financing model that does not dilute equity participation. In Brazil, Itaú BBA said in an interview with Bloomberg Línea that it has built a venture debt book with its own funding from the bank’s balance sheet.

In this separate venture debt structure, Itaú has R$300 million (nearly $57 million) to allocate to startups by the end of this year, with the idea of investing in smaller ticks of more early-stage companies. “We have already made several clearances and in two to three weeks we will have another transaction to announce,” said Fábio Villa, commercial director at Itaú BBA.

In recent days, Goldman Sachs (GS) has provided a $140 million credit line to Chilean fintech Xepelin and Mexican payments fintech Clip has secured a $50 million three-year unsecured revolving credit facility with Morgan Stanley (MS), J.P.Morgan (JPM) and HSBC (HSBC), while Goldman Sachs has provided a $150 million collateralized credit line to Mexican loan and expense management firm Clara. The US bank also lent $233 million to Mercado Livre (MELI) in July, participated in Nubank’s (NU) $650 million credit line earlier this year, and provided $160 million to Mexico’s Konfio last year.

With the bank’s own portfolio, Itaú said it has a credit portfolio of R$5 billion for technology companies. “We do everything from revolving credit, but a good part of these credits are structuring lines, usually between one capitalization and another, and in that early-stage life stage upwards,” Villa explained.


“It’s a complementary alternative line, we’re pretty active. For the company that has a proven thesis, has a large addressable market, we make our bet and use our balance sheet a lot,” he said. The bank has already financed transactions from CloudWalk, MeuTudo, Listo, from credit origination to distribution in the fixed income market.

Even so, equity rounds for Seed and early-stage startups remained strong in Latin America in the first six months of this year, with 113% and 48% year-on-year growth, respectively, compared to the first half of 2021, according to data from LAVCA (Association for Private Capital Investment in Latin America).

For this reason, Rodrigo Catunda, leader of General Atlantic in Brazil, said he does not advise startups to use venture debt as an aggressive strategy.


“If I look at a company with venture debt and wants to raise capital with me to pay off a debt, I’m going to be a little fearful,” he said, during the Bloomberg Línea Summit held on Wednesday (14) in São Paulo.

When the startup raises venture debt and the market corrects, it can work, according to Catunda. But he says the crisis can last longer than the entrepreneur imagines. “It’s a more defensive instrument when the company really needs to take on expensive debt because it doesn’t have equity available. There are moments and moments. It’s a risky thing, it requires a lot of caution and needs to be very aligned with shareholders.”

General Atlantic said ‘no’ to investment in Nubank

At a recent event of the Brazilian Private Equity and Venture Capital Association (ABVCAP) Santiago Fossatti, partner at Kaszek, said the venture capital firm’s biggest mistake was not investing in dLocal (DLO), an Uruguayan cross-border payments startup.

“Our biggest mistake was not investing in a company that worked out, a clear case was dLocal, how dumb were we to not understand the potential that company had? That’s what takes our sleep away, letting good companies pass us by,” he said.


dLocal, with a similar business model to Stripe, has Brazil’s Ebanx as one of its main competitors in payment processing in Latin America. The fintech made its IPO on Nasdaq in June 2021, with a valuation of $6 billion. Today, the company has a market cap of $7.9 billion.

In this case, General Atlantic didn’t make a mistake. Today, the global growth equity firm is dLocal’s largest shareholder, with 35.60% of the outstanding shares.

But GA’s biggest regret is not having invested in Kaszek’s investee Nubank.


“We were even unhappy because David [Vélez, CEO of Nubank] worked with us, it was a natural investment. But every time we came to the rounds we came back with a big problem: valuation,” said Catunda, during the event. “Many times we sin by being conservative in valuation and sometimes we get it wrong in opportunities like this.”

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