Debt financing drives faster growth & higher startup valuations

A new study has found that startups that use debt financing achieve faster revenue growth and higher valuations compared to those relying solely on equity.

The analysis was conducted by fintech re:cap and equity management software provider Eqvista, drawing on more than 10,000 data points from 530 early-stage startups. Their findings indicate that debt can act as a significant lever for growth, particularly for younger companies with revenues between USD $100,000 and USD $1 million.

The role of debt

According to the study, startups leveraging debt achieved median valuation uplifts of up to 49.7% in comparison to peers focusing exclusively on equity. For companies in the earliest revenue bracket of USD $100,000-$1 million, debt users showed notable advantages with both increased growth rates and higher valuations.

The research highlights that businesses missing out on debt financing could be foregoing considerable value. As an example, the study notes that a company valued at USD $4.2 million without debt could potentially reach a valuation exceeding USD $6 million with the inclusion of debt in its capital structure.

Insights from founders

The perspective among startup founders has been shifting in light of these findings. Sophie Chung, founder and Chief Executive Officer of Qunomedical, commented on her experience raising debt: "Raising equity now wouldn't be a smart move given our near break-even point and the expected surge in growth. We need to demonstrate traction once more and enter the next fundraising round from a position of strength. Additional dilution at this stage would only be detrimental."

This sentiment is echoed by many founders who are increasingly viewing debt not just as a means of funding, but as a deliberate strategy to retain control and optimise the timing of future equity rounds.

Debt trends among startups

The study identified clear trends in how startups adopt debt as they scale. The proportion of companies using debt increases with company size: 24% among those with revenues between USD $100,000 and USD $1 million, 26% in the USD $1 million-$5 million bracket, and 36% among those with USD $5 million-$10 million in revenue. This pattern suggests that access to and confidence in debt as a funding mechanism grows with a company's maturity.

The link between debt and valuation uplifts was consistent across different revenue levels. Startups in the lowest revenue bracket saw valuation multiples 49.7% higher for those using debt. In subsequent brackets, the uplift was 46.5% and 29.7% respectively. These statistics demonstrate the strong association between diversified capital structures and company value.

Early-stage companies benefited most in relative terms, with those using debt reporting a compound annual growth rate (CAGR) of 35%, slightly above the overall average of 34.2%. By utilising debt, founders often managed to accelerate growth without the need to give up additional equity, which led to higher subsequent valuations.

Strategic tool, not last resort

"Debt for startups is a strategic opportunity; when managed with foresight, it can unlock growth, preserve equity, and signal discipline to investors. This research shows that debt should not be considered a last resort, but rather a core component of a diversified capital stack. Startups that understand this dynamic are better positioned to scale sustainably and retain control of their future," said Paul Becker, CEO and co-founder of re:cap. 

For later-stage startups, the study suggests that the strategic use of debt can signal financial discipline and maturity to investors, which can improve a company's negotiation stance in future funding rounds.

Access and maturity

The joint research from re:cap and Eqvista indicates that as the variety of debt providers expands, access to debt financing is improving for early-stage startups. This increase in options allows more founders to leverage debt as part of their funding strategy, broadening the potential for growth and higher valuations within the startup sector.