Startup leaders sound off on the future of venture debt in fallout from Silicon Valley Bank collapse
Silicon Valley Bank’s motto, “Make Next Happen Now,” in neon inside its Portland, Ore., office. (SVB Photo)
Founders who had venture debt lines with Silicon Valley Bank are trying to find new types of loans or debt capital in the fallout of Silicon Valley Bank’s collapse.
“Real talk. I’m getting a LOT of (funded) founders asking for recommendations on where to access loans for operating capital, inventory, etc.,” Leslie Feinzaig, managing director at Graham & Walker, tweeted this week.
SVB was a top provider of venture debt, a specialized loan that helped startups fund their growth and bridge the gap between investment rounds.
Andy Liu, partner at Unlock Venture Partners, told GeekWire he expects unprofitable startups will now have a harder time raising venture debt from banks.
Jason Stoffer, partner at Maveron, said there will be “less cheap bank debt.”
“How many banks are now saying, ‘yeah, let’s do more high-risk lending to early-stage portfolio companies of venture firms?” he said. “I don’t think there are many bank CEOs having that discussion right now.”
For startups trying to operate without venture debt, “they’re in for challenging times ahead,” wrote Spencer Rascoff, the former Zillow Group CEO and active angel investor.
“To fill that funding gap, maybe we’ll see more private lenders step in and provide venture debt as a product,” he wrote in dot.LA. “If that is the case, I suspect terms will be tougher and many VCs will recommend against it for their companies.”
Some private lenders have jumped on the opportunity to fill the gap. Others are seeing increased demand.
Lighter Capital, which offers revenue-based debt instruments to early-stage startups, just experienced its busiest week this year with inbound requests for funding. The Seattle-based lending firm saw a wide variety of companies seeking venture financing, including non-tech clients, said CEO Melissa Widner.
Venture debt lending has been on the rise. Last year’s Q2 was the second-largest quarter in terms of total venture debt value over the past decade, according to PitchBook data.
SVB was an outsized player in the space. The lender participated in about 75 funding rounds last year, with a primary focus on venture debt, resulting in a deployment of roughly $6.7 billion, according to PitchBook.
Early-stage founders use venture debt to retain ownership control and avoid the risk of a down-round, when cash is raised at a lower valuation than a previous round. It also helps founders avoid selling equity at valuations which they expect to exceed in future rounds.
Rascoff said he expects to see new regulations prohibiting banks from requiring customer exclusivity in exchange for additional services.
Many companies that had a venture debt line from SVB needed to keep a minimum deposit to fulfill loan requirements. In exchange, the bank provided more appealing loan offers than what’s typically offered to early-stage startups.
Rascoff said some companies who pulled deposits out of SVB are now thinking about putting the cash back so they can access venture debt. “There are conflicting reports, but it appears that SVB is allowing these companies to keep a second banking relationship with another bank (so no more exclusivity), but at least half of their cash must be with SVB,” he wrote.
Tim Mayopoulos, CEO of Silicon Valley Bridge Bank, the newly established firm created by regulators to manage the bank, wrote in a memo earlier this month that SVBB will honor existing credit facilities.
The outcome of SVB’s loan book remains in flux. It hinges partly on the investors or institutions that acquire the assets in an ongoing auction reportedly being handled by the FDIC.
Private equity firms such as Apollo, Blackstone and KKR have been reported to be bidders, but it remains unclear if they will maintain the same level of venture debt lending as SVB.