The fallout from the Silicon Valley Bank failure, elevated interest rates, and recently inflated valuations have made venture debt difficult to obtain for early-stage companies.
Now, even investment from top venture firms — something that would have opened the door to venture debt in the past — is often not enough, market participants told Transacted.
“A couple of years ago, if you had a tier-one investor like Andreesen or Sequoia, you got venture debt without even trying,” said Nelson Chu, CEO of private credit marketplace Percent.
Now, however, many startups have found venture debt is simply no longer an option.
Angela Lee, professor of venture capital at Columbia Business School and the founder of startup investment network 37 Angels, says the current environment has led to a unique situation in which “the demand for venture debt is even higher because other sources of fundraising are hampered.”
Lee explains that many lenders are still cleaning up from the excesses of 2020 - 2022, when startups took on debt at peak valuations. Now that the market has retrenched, many venture debt providers are stuck with challenged loans—often, the only viable option is to amend and extend.
Valuation pressures haven’t been the only drag on venture debt issuance: the other key catalyst was the March 2023 collapse of SVB, which held a 50 percent market share. The firm’s sudden retreat left a $6.7 billion hole in the market, which posted a 38 percent year-over-year decline in the same quarter.
Marshall Hawks, head of relationship management for SVB, says that despite last year’s challenges, 85 percent of SVB’s clients have continued to do business with the firm.
The bank feels “very fortunate to be back in business as part of First Citizens,” he adds. In the second half of 2023, SVB’s Tech and Healthcare Banking team made more than 500 new loans totaling more than $3 billion in commitments to new and existing clients.
Even with positive signals from SVB, Lee cautions that startups should expect a prolonged period of debt financing challenges. Including, she adds, tougher covenants going forward.
But, Lee believes that the biggest impact is still simply higher interest rates.
“Unless the Fed does something dramatic with interest rates, which I do not think will happen, venture debt will be difficult to raise for the foreseeable future,” Lee said.