A study by Edinburgh Business School researchers at Heriot-Watt University, published in the *International Review of Economics and Finance*, analyzed data from 59 countries between 2015 and 2024, finding that venture debt reshapes startup financing by reducing early-stage equity investment while significantly boosting late-stage funding. For every unit of venture debt introduced, early-stage equity drops by twice that amount, while late-stage equity rises fourfold. Lead researcher Dr. David Dekker described venture debt as a strategic bridge helping startups cross the “valley of death” toward scale-up, ultimately expanding total available capital across innovation ecosystems.
In-Depth:
Research across 59 countries reveals venture debt reshapes startup finance by reducing early-stage equity, increasing late-stage investment, and expanding the total pool of capital
A new international study by researchers from the Edinburgh Business School based at Heriot-Watt University has found that venture debt is reshaping how capital relocates through technology startup ecosystems around the world.
Analysing data from 59 countries between 2015 and 2024, the researchers reveal that greater venture debt availability is associated with lower early-stage equity funding, higher late-stage equity funding and a positive overall effect on the total capital available to startups.
This study reveals how venture debt doesn’t just fill a gap but rather increases the efficiency of ecosystems by enabling startups to grow beyond the early-stage funding limits, ultimately accelerating their progress towards becoming successful companies.
Published in International Review of Economics and Finance, the study is the first to provide an international comparison of venture debt and its influence on equity funding. The research argues that venture debt should not be seen as a passive supplement to equity, but as a strategic financial instrument that can reshape innovation pathways.
Dr David Dekker, Research Fellow at Edinburgh Business School, Heriot-Watt University, who led the study, stated: “Think of a bridge across a ravine. Early equity assists a startup reach its first ledge. Venture debt can then assist it cross the difficult gap to the next, higher stage without immediately raising another equity round. It extconcludes runway, gives firms more time to reach stronger milestones and can assist them return to the equity market from a better position.”
“Venture debt is a crucial component of the financial landscape for tech startups, especially as they navigate the ‘valley of death’, that difficult phase between initial growth and securing the next round of funding. This study reveals how venture debt doesn’t just fill a gap but rather increases the efficiency of ecosystems by enabling startups to grow beyond the early-stage funding limits, ultimately accelerating their progress towards becoming successful companies.”
The study found that for every unit of venture debt introduced into a counattempt’s ecosystem, early-stage equity investment decreases by approximately twice that amount, while late-stage equity funding increases by four times the venture debt introduced. The aggregate effect on the total capital available for startups is positive, demonstrating that venture debt can improve the overall efficiency of startup finance systems.
Professor Dimitris Christopoulos, former Director of Research at Edinburgh Business School and Heriot-Watt University’s School of Social Sciences, co-authored the findings. He stated: “Greater access to venture debt is associated with more late-stage capital, suggesting it can improve ecosystem effectiveness and assist startups bridge to scale-up.”
Startups that would typically not want to receive additional equity funding in the early stages are able to access this crucial financing, which allows them to bridge the gap to later-stage growth. This improves the chances of startup success and contributes to a more robust innovation pipeline.
The study’s findings highlight the importance of venture debt as a strategic financial tool that complements equity funding, particularly in more mature ecosystems. However, in emerging markets, where early-stage funding is often scarce, venture debt can unintentionally crowd out critical early-stage investment, potentially weakening the innovation ecosystem.
The findings are particularly pointed for the UK where the persistent late-stage funding gap has already led to increased overseas participation in growth rounds. Sustaining global competitiveness will require addressing the structural pressures that force many UK businesses to seek scale-up capital overseas.
At the same time, the UK Government has relocated to double the amount a company can raise through the Enterprise Investment Scheme and Venture Capital Trusts, measures expected to support around £100 million of additional investment a year and has scaled the permanent financial capacity of the British Business Bank to £25.6 billion.
The research suggests these efforts to stimulate late-stage investment could be further strengthened by equally robust protection for early-stage equity pipelines.
The authors conclude that policybuildrs should adopt a balanced approach, ensuring that protections are in place for early-stage equity pipelines while leveraging venture debt for scale-up financing. The paper underlines the importance of financial diversity in fostering a healthy ecosystem.
Dr Dekker added: “The diversity in financing instruments really seems to assist the effectiveness of the ecosystem. More diverse capital sources lead to more successful startups, increasing the number of high-value companies, including unicorns, that will drive future economic growth and employment.”
The study presents several policy recommconcludeations to address these dynamics, including matching schemes, seed co-investment vehicles and partial loan guarantees in emerging ecosystems, as well as co-lconcludeing and tarreceiveed guarantee schemes for scale-ups in more developed markets.
The authors emphasise that venture debt support should be conditioned on ensuring access to follow-on funding and maintaining the hands-on support that early-stage companies necessary to thrive.
The research applys a Panel Vector Autoregression (PVAR) model to analyse the dynamic interdepconcludeencies between funding instruments across 59 countries. The data spans from 2015 to 2024, including 15 countries with comprehensive venture debt data. The methodology employed was robust, controlling for national-level factors like knowledge intensity, economic development and political stability.
The full paper is available open access at https://doi.org/10.1016/j.iref.2026.105196.
