Venture Debt Is Changing What Startup Equity Is Worth
European startups raised €5.9 billion of venture debt in the first quarter of 2026. The average transaction reached €90.5 million, up from €35.9 million in 2025, while only 78 deals closed. Half of the ten largest transactions involved AI companies.
A handful of large financings drove the increase. AI companies account for much of the demand because training models, securing computing capacity and building data centres require more capital than the software businesses that shaped earlier venture cycles. Startups that once relied mainly on equity now add debt to fund infrastructure, extend runway or delay another priced round.
A startup valued at €1 billion in its latest funding round does not leave €1 billion for shareholders if somebody buys the business. Lenders collect according to their contractual position. Preferred shareholders rely on liquidation preferences negotiated during earlier rounds, while venture-debt providers often receive warrants alongside interest.
Take a company that raises equity at a €1 billion valuation, adds €150 million of debt and later sells for €800 million. The €200 million decline in enterprise value does not reduce every investor’s position by 20 percent. The lender takes repayment from the sale proceeds before the remaining value reaches shareholders. Preferred-share terms determine the allocation between equity classes after that. Common shareholders absorb a much larger loss than the headline valuation suggests.
Venture funds face those economics inside their portfolios. A manager reporting a company at the price established during its latest equity round may hold shares in a business that has since borrowed heavily. Debt outstanding, accumulated interest, maturity dates and contractual preferences all sit between the reported enterprise value and the proceeds ultimately available to the fund.
European startups also have more reason to borrow as they remain private for longer. European VC investment reached $25.6 billion across 1,636 deals in the second quarter of 2026, with large AI transactions accounting for much of the value, while M&A produced most venture exits. A company still spending heavily several years after its first institutional round needs another source of capital if management wants to avoid issuing equity at the price available at that moment.
Borrowing provides the cash without immediately repricing the company or selling another large block of shares. Interest starts accruing and the principal still reaches maturity. A startup approaching that date with twelve months of cash enters its next fundraising with less room to negotiate than a debt-free peer. New equity investors know how much fresh capital has to cover existing obligations, while lenders know when management needs refinancing.
Venture lenders price the risk through interest, covenants, security and warrants because startups often lack the earnings history, free cash flow and assets that support conventional corporate borrowing. The European Investment Bank generally targets companies that have already raised institutional equity and reached the commercial stage. Its typical venture-debt financing ranges from €10 million to €50 million, with larger facilities available to scale-ups valued above €500 million.
Repayment often relies partly on the next stage of the company’s financing history. Revenue growth supplies cash in some cases. Another equity round refinances the balance sheet in others. An acquisition or public listing gives the company and its investors another route to repay lenders.
A weak fundraising market removes several of those options at once. Falling private valuations reduce the value of the equity while lower investor appetite makes another round harder to complete on favourable terms. A borrower that expected to refinance after reaching a higher valuation instead faces a down round, tougher negotiations with lenders or a sale under pressure.
AI has pushed venture debt into much larger transactions. Nscale raised $1.4 billion of debt in the first quarter before completing a $2 billion Series C. Mistral secured roughly $830 million of debt for a new data centre. Those amounts bear little resemblance to the smaller facilities startups historically added after an equity round to gain several additional months of runway.
Large debt packages also change what an LP needs from a venture manager. The last-round valuation no longer gives enough information about the value of a holding. Debt outstanding, interest costs, maturity dates, liquidation preferences and warrants determine how much of an eventual sale price reaches the fund.
Take two portfolio companies that both carry a €1 billion valuation. The first has little debt and a simple share structure. The second owes €200 million, has several preferred-share classes and has issued warrants to lenders. A €700 million sale produces very different outcomes for the venture funds holding their shares even though both companies entered the portfolio report at the same headline valuation.
LPs analysing venture funds therefore need to look below the valuation assigned to each portfolio company. A €1 billion private-market valuation records the price investors agreed during a financing round. It does not show how much of €1 billion belongs to the equity once the rest of the capital stack has been paid.
