The Convertible Note Is Dead Long Live the Convertible Note

The convertible note is dead. Long live the convertible note.

In Silicon Valley, the SAFE has (pretty rapidly) come to dominate early-stage investing. Companies that have yet to raise a priced round see about 80% of the volume of capital flowing through SAFEs.

But the convertible note remains important - especially in industries with higher upfront capital needs and in less mature venture ecosystems (the Midwest in particular).

𝗜𝗻𝗱𝘂𝘀𝘁𝗿𝗶𝗲𝘀 𝘄𝗶𝘁𝗵 𝗵𝗶𝗴𝗵 𝗰𝗼𝗻𝘃𝗲𝗿𝘁𝗶𝗯𝗹𝗲 𝗻𝗼𝘁𝗲 𝘀𝗵𝗮𝗿𝗲:

• 45% of capital invested into early Medical Device companies went through Convertible Notes over the last 2 years, the highest such percentage of any major industry.

• 43% went through CNs for Pharma/Biotech

• 38% for Energy (and that's basically only renewable sources)

𝗜𝗻𝗱𝘂𝘀𝘁𝗿𝗶𝗲𝘀 𝘄𝗶𝘁𝗵 𝗹𝗼𝘄 𝗰𝗼𝗻𝘃𝗲𝗿𝘁𝗶𝗯𝗹𝗲 𝗻𝗼𝘁𝗲 𝘀𝗵𝗮𝗿𝗲:

• Standard SaaS companies saw 84% of early-stage money come through SAFEs

• Edtech favors SAFEs even more strongly (87% of total funding)

• 9 out of 10 dollars to Gaming companies are raised on SAFEs these days

These two instruments have many similar characteristics. They can each come with a valuation cap and a discount (or neither). They can convert pre or post money.

The major difference is the interest rate attached to the convertible note. This means the note has a maturity date as well, which puts a bit of a deadline on the young startup in terms of their next fundraise.

Median interest rate on a CN in Q3 2023 was 7% by the way - up from 6% where it had been most of the past 12 months.

Founders - you'll likely run into investors with strong feelings about using one or the other of these funding types. The SAFE is certainly ascendant, but the good ole convertible note is holding fast.

Good luck in the fundraising dash before the end of 2023!

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