The collapse of Silicon Valley Bank left a small but noticeable hole in the venture debt market that private lenders don’t find attractive enough to fill.
When SVB went under in March, the startup ecosystem was primarily concerned about what would happen to startup and venture capital firm bank accounts. The second worry was what would happen to the venture debt market and the existing loans SVB had issued.
While SVB didn’t manage a massive loan portfolio by any means, it was in the minority of banks that provided credit to really early-stage companies based on their sponsors as opposed to their underlying business metrics and fundamentals. Most banks aren’t willing to do that.
While it remains unclear whether First Citizens Bank, the current owner of SVB, will lend to startups the same way SVB did, private venture debt lenders have made it clear to TechCrunch+ that they aren’t interested in filling that gap if First Citizens doesn’t.
Runway Growth Capital’s founder, CEO and CIO, David Spreng, said that the math on many of these loans just doesn’t add up for lenders like himself, because the math didn’t work on the loans for SVB, either. SVB wasn’t making real money on these products, Spreng said, but rather as a hook for other bank products or to deepen the bank’s relationship with various venture capital clients.
“They were making loans to pre-revenue companies at prime, and prime is for your best borrowers,” Spreng said. “The rate that was being earned by the bank was subsidized by all these other ways of making money.”
These loans on their own don’t make much sense to any underwriter, he said. Most of SVB’s loans were built off the relationships and sponsorship by VC funds the bank was already friendly with, both Spreng and other venture debt lenders said. Most of these companies didn’t have any type of metrics or collateral to underwrite, making them inherently more risky than the type of loans most venture debt lenders are focused on.
Venture debt is a hard asset class in general, Spreng said, adding that many of the larger credit lenders who had expressed interest in starting a venture debt strategy in recent years — including Blackstone and KKR — have all quietly backed off. For them, even doing the larger loans that venture debt lenders like Spreng underwrite wouldn’t make sense — let alone the ones SVB lent to really early startups, he said.
“It is such a mismatch for KKR, Blackstone, Carlyle or Apollo to be out making million-dollar loans to pre-revenue companies because it was backed by Andreessen or Greylock,” he said.
Because of this, unless other banks are willing to underwrite these risky loans, it is likely a gap that won’t be fully filled, Spreng said. “I think that world is in for a little bit of trouble,” he said. “That space is going to have a bumpy ride and may actually cease to exist. I don’t think that is a bad thing.”
Neither does Kai Tse, the co-founder and managing partner of venture debt firm Structural Capital. He said that because of this void, the debt that will still be available for these young startups from other regional banks, like Bridge Bank, will get more expensive or require more collateral, both of which are normal and healthy in the debt asset class.
“I think it is evolving,” Tse said. “There is a clear need for capital. PitchBook says that there is three times more demand for capital than there is supply. That’s OK, because a lot of those companies don’t deserve the supply.”
But the supply will, of course, still be there for the good companies that are able to raise in any environment. That is where the opportunity lies for venture debt lenders in a post-SVB world.
Kyle Brown, the CIO and president of Trinity Capital, said that his firm is going to go lower in the capital stack opportunistically, but not for the really early startups. Rather, the firm will focus on those that are more established and may not have considered raising debt from a private lender until the collapse of SVB.
Traditionally, SVB and others that lend in this space generally required their customers to have their full banking suite under their roof. However, after SVB’s collapse, that isn’t a proposition startups are going to continue to blindly agree to. Those that don’t will find that turning to private lenders may be the better option.
“Companies would rather pay more for a loan than have all their cash in one bank,” Brown said. “We have seen it reflected in our pipeline. Companies are willing to pay a few more basis points to work with a private lender for their debt rather than take the risk of having their capital in the bank. That’s the biggest change I’ve seen.”
But, of course, the changing rules of venture debt just do not apply to the “best companies.” All of the lenders that spoke to TechCrunch+, in addition to the VCs who answered our recent survey about venture debt, echoed the same refrain: There will always be money and loans for the good companies that need them.
Everyone else, good luck.
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