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Venture Debt Boom Belies Risks

Venture capital funding rounds may tend to get all the attention, but debt financing for technology startups is on the rise again—at least for now.

Web survey company SurveyMonkey, hardware maker Jawbone, marketplace Etsy and mobile social network Foursquare have recently chosen to borrow hundreds of millions of dollars collectively in later rounds of financing. Bankers say more early and mid-stage companies are raising debt, too, as entrepreneurs seek fresh funds without giving up equity.

But there are signs that the debt trend could be nearing a peak as more lenders enter the space. Increased competition is likely to drive down returns and lower interest rates. That could make lending money to tech startups less attractive, bankers say. And as rates fall, more companies will seek debt, adding to the risk that firms will loan money to companies that can’t repay.

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TriplePoint Capital, which has loaned to tech companies Bloom Energy and Chegg, quietly registered last July to list its debt financing operation on the NYSE. When public investment firms register for an IPO it often signals that the market is nearing the top of a cycle, much as the 2007 IPOs of Fortress and Blackstone preceded the top of the hedge fund and private equity booms. TriplePoint declined to comment.

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“2013 was phenomenal for lending and we feel good about 2014, but beyond that we’re cognizant of the exuberance,” says Jacob Moseley, Silicon Valley Bank.