Companies strategically using debt showed higher revenue multiples in new research.
What’s happening: Research from fintech re:cap and equity management software provider Eqvista analysing 530 early-stage startups found companies using debt financing had higher revenue multiples than equity-only peers. However, actual revenue growth rates differed by less than one percentage point, and the study acknowledges that correlation does not establish causation.
Why this matters: The findings suggest debt-ready startups may already be better performing and better managed, which could explain higher valuations regardless of debt use.
A joint study by Berlin-based fintech re:cap and equity management software provider Eqvista has reignited debate about debt financing in early-stage startups.
The research, analysing more than 10,000 data points from 530 companies, found that startups using debt achieved higher revenue multiples, with companies in the $100,000 to $1 million revenue bracket showing multiples 49.7% higher than equity-only peers.
“Debt for startups is a strategic opportunity; when managed with foresight, it can unlock growth, preserve equity, and signal discipline to investors,” said Paul Becker, CEO and co-founder of re:cap. “This research shows that debt should not be considered a last resort, but rather a core component of a diversified capital stack.”
However, the study’s methodology raises questions about whether debt causes higher valuations or simply correlates with better-performing companies.
Tiny growth difference
Whilst the valuation multiple difference appears substantial, actual operational performance tells a different story. Companies in the $100,000 to $1 million bracket that utilised debt experienced 35% compound annual growth rate compared to 34.2% overall, a difference of less than one percentage point.
The research shows debt adoption increases with scale: 24% of companies in the $100,000 to $1 million bracket use debt, rising to 26% in the $1 million to $5 million bracket and 36% in the $5 million to $10 million bracket. This progression reflects greater access to debt as companies mature, but also suggests that stronger companies become eligible for debt financing, potentially explaining the valuation correlation.
Selection bias matters
The study’s sample of 530 startups across Europe and Australia may not represent the broader global startup ecosystem. More critically, companies that qualify for debt financing typically demonstrate stronger financial metrics, operational discipline and business model validation, factors that independently drive higher valuations.
Sophie Chung, founder and CEO of Qunomedical, explained her approach to debt financing. “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.”
Her perspective illustrates that debt-ready companies often occupy stronger negotiating positions regardless of whether they ultimately use debt, making it difficult to isolate debt’s specific impact on valuations.
Risks not mentioned
The research does not address critical aspects of debt financing that affect startup outcomes. Repayment obligations, interest rates, covenant constraints and the pressure of fixed payments during revenue volatility remain unexamined in the study’s findings.
Australian startups continue to attract significant capital, with four companies securing $38.76 million in fresh funding this week alone, demonstrating sustained investor appetite for equity financing despite debt’s theoretical advantages.
For early-stage companies, the data suggests that incorporating debt into the capital structure correlates with higher valuations, but whether debt causes this effect or simply identifies companies already positioned for success remains an open question. Founders considering debt must weigh not only potential valuation benefits but also repayment obligations and operational constraints that the research does not quantify.
The study contributes to understanding how capital structure relates to startup valuations, but stops short of proving that debt drives higher valuations rather than simply identifying companies with stronger underlying fundamentals.
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