Q&A: Bootstrap Europe’s debt strategy targets high-growth tech companies

Bootstrap Europe, a London-based private lender founded by two women of color, provides growth debt to companies across Europe. Now the firm is adding investment firepower with the initial close of its third fund on $127 million in commitments.

Bootstrap Europe III has secured allocations from existing investors and new limited partners including the European Investment Fund. The new vehicle gives Bootstrap $225 million in investment capacity, as the firm has the ability to reallocate proceeds from investments in the fund. It is on track to raise more than $200 million at the final close of Fund III, which is expected in October. 5Capital Funds Placement is advising the firm on the current fundraising.

Currently, Bootstrap manages $250 million in assets, with significant co-investment capital available to underwrite larger transactions.

Fund III is already twice the size of its predecessor, Bootstrap Europe II, a 2019-vintage vehicle that posted distributions to paid-in capital, or DPI, of 60% as of January.

The firm’s strategy is to originate senior secured loans to high-growth technology companies. The loans also incorporate a warrant that gives the firm the right to purchase a specified number of shares at a given price within a specific period of time. The firm writes checks as small as €1 million, but its average investment size is between €5 million and €10 million.
 
Bootstrap was launched in 2015 by Fatou Diagne, born in Senegal, and Stephanie Heller, originally from France. Both graduated from the HEC Business School and built careers in the finance world. Diagne has advisory experience in cross-border acquisitions, high-yield debt and equity financing, while Heller has been an adviser on acquisitions, IPOs and leveraged transactions, in addition to managing private equity assets.

The two founders sat down for a Zoom interview with PitchBook on Bootstrap’s core strategy, the challenges they faced launching an investment firm dedicated to growth debt and the economic risks they are monitoring.

PitchBook: What type of companies do you typically invest in?

Heller: We typically invest in companies that are in the growth stage, mostly having raised Series B or Series C funding or beyond. We are different from venture debt, which focuses on companies raising seed financing or Series A rounds, but we don’t rule out going to Series A. Companies we invest in are usually five to seven years old, and are usually generating an annual revenue growth of 50%, 100% or more.

Diagne: These are companies that are trying to do a proof-of-concept of their technology. They are already past the technology risk, they have a large customer base, or have proven unit economics. They just want to put fuel in the engine. They’re cash-flow negative, but they have received significant equity investments from growth equity funds or venture capital funds.

PitchBook: What sectors do you find attractive to originate growth debt?

Diagne: We have always been very interested in sectors with two characteristics. Sectors that have deep technology content, so what we call “nerdy businesses,” because they are bringing a step-change in the technology where they operate, rather than just replicating another business model. We want something that creates a different value for customers because their competitive differentiation is much higher. And when they get into trouble, they are much more resilient because their technologies take a long time to develop. We like sectors such as B2B, life science, biotech and medtech.

We also look for companies with a mission. We are not labeled as an impact fund, but three-quarters of our portfolio can be qualified as impactful. We believe technology is at the service of those types of objectives, and we want to finance the entrepreneurs who meet the societal challenges we are facing today.

For example, we finance companies producing pheromones, which are a replacement for pesticides, in the water filtration industry, in recycling of leather—which is one of the most polluting industries—in electric motors and in genetic testing. We believe that those companies, in addition to having awesome technologies, are pursuing better goals for society.

A deal we recently announced was with a company called Boxy. It builds and operates autonomous stores where customers shop without using a credit card and there’s no cashier. This was part of a $25 million round in which we participated alongside top French VCs and UK VCs.

PitchBook: What is the reason that venture debt or growth debt is much less common in Europe, compared to other regions such as the United States?

Diagne: There are several reasons for this. One of the primary reasons is that the European venture and technology ecosystem is still less mature than that of the US. Over time, the more successful entrepreneurs and technology companies we will have in Europe, the more VC funds and VC investors we will have. Experienced investors and entrepreneurs, that have navigated different cycles, understand the use of a more differentiated set of financial tools, including venture and growth debt.

In Europe, it has taken a bit of time to penetrate the mindset of entrepreneurs and their shareholders to use venture debt as a tool. The market still needs to be educated on the use of growth debt. Ten years ago, it was a battle to convince entrepreneurs to use growth debt. Then, you need to go several levels up for the LPs to understand the use and importance of this tool in the ecosystem. And then you need the people who know how to deploy the capital. So, it takes a bit of time, but we have started to see acceleration in the adoption and understanding of venture debt. 

Heller: Another obstacle is recruiting technology investors who have done debt underwriting, because most people [in the tech investment sector] are venture capitalists doing equity deals. You want to underwrite as a debt professional.

Diagne: The difficulty is you ask people to have credit skills and also understand the equity profile of a venture company. Very few people have had the opportunity to train that mindset during their financial career. The closest you could find is people working in structured credit or convertible bonds.

PitchBook: Does being women of color make any difference when you make investment decisions, or pitch your funds to investors?

Diagne: We never saw ourselves as women investors of color until people started pointing it out to us. Because for us, at the end of the day, what matters is the investment.

I would say the difference is because we might not look like each other, it means that we have had to be more open-minded and more curious about everything. We try to be more insightful than what reality looks like.

This comes up a lot in our investment process. We will not say no to an investment just because it’s not familiar to us; we will be curious and investigate and not have a prejudice about where it comes from or what the founder looks like.

We want to be fair to all entrepreneurs coming in. That also implies keeping awareness of whether we have biases. If you look at our team. It’s super diverse. We have 12 nationalities in a team of 10 people. We speak many different languages and have 50-50 gender parity.

Heller: I don’t think that being women of color does make a difference in the sourcing of companies. I think what it creates for us is [the ability] to come and invest in companies that have a more sustainable way of doing things. With our own DNA, we’d like to finance businesses that are truly helpful for the world. Our portfolio has about two-thirds of companies with an ESG background. So we do have a tendency toward more sustainable businesses. We’ve invested in companies in electric motors or DNA sequencing for rare diseases.

When you talk to limited partners in Europe, they do not look for funds managed by minorities; they look for ESG-friendly investments. In the US, LPs are trying to find managers that have that diversity and push that diversity to fund investments. I think it might be coming to Europe, with some delays.

PitchBook: What does the fundraising environment look like for the venture debt [and] growth debt GPs nowadays?

Diagne: 2021 is a year of records in many aspects. About €100 billion has been invested in European technology in 2021. It’s the largest year ever, and it’s on track to catch up with the US. Europe is also delivering more IPOs than the US in the technology sector. This also impacts the fundraising for VC funds. There is more money allocated to the venture funds, whether they’re doing equity or debt. That’s a great tendency.

But what’s hidden is that the growth in the number of growth debt funds for the technology sector is significantly less than the growth in the venture capital funds. So the money has been concentrated in funds that are getting larger and larger. We have seen this during our fundraising.

It was easier for us, because we’re on Fund III, to raise from our existing investors. You have built the track record, so they will try to give you more. But at the same time, we have had conversations with LPs who have told us they are just going to concentrate on existing relationships, rather than getting into new VC managers. And I think that’s a shame for the industry, because we’re missing out on new ideas.

PitchBook: How do you think the unfolding event in Ukraine and Russia will impact the technology sector in Europe?

Diagne: You will see in the short term that any business that has ties to Russia is going to be in trouble. Ukraine was a massive platform of technological development for a lot of startups in Europe—think of Ukrainian developers. A lot of companies used that workforce. So that’s going to have an impact in the short term as companies have to relocate people or find alternatives.

And then I do believe that this is going to create opportunities for Europe to stop being so dependent on Russian gas. If you think Europe has to stop using fossil fuel, this means it has to use alternative energy sources and develop the ecosystem around them.

A good example is a company called Northvolt in Sweden. It develops one of the largest battery factories in Europe. This company has raised the largest debt facility that a startup in Europe ever has. It was bigger than any of the venture debt that the European investment banks had ever provided. … So this is a simple example of what needs to happen for energy independence to become a reality. And then myriad other things like charging stations or electric vehicles.