After the failure of Silicon Valley Bank, the once-sleepy venture debt market became a hotly contested battleground that has been won largely by nonbank lenders—at least until recently.
On the heels of losing access to their bank deposits and credit lines, many startups turned to private debt providers, which issue loans from LP capital rather than depending on customer deposits. Private lenders have had their pick of deals and were able to execute less-risky deals at higher rates.
Now, it looks likely that nonbank lenders’ dominance could prove to be temporary as this market segment evolves. Loans from banks tend to be significantly less expensive than private fund debt. And as the SVB fiasco and its aftermath fade further into the past, venture debt from existing lenders and, more importantly, from new entrants such as HSBC may give startups a bevy of fresh new alternatives for financing.
“Nobody wants to go to a venture bank,” said David Spreng, CEO and CIO of venture debt firm Runway Growth Capital.
He acknowledged that borrower preference for private lenders is no longer absolute. “I don’t think it’s the end of people taking money from banks. We’ve lost two deals [to a bank] in the last month,” said Spreng. “We wanted to work with these borrowers, but they got an offer from a bank at a really attractive rate.”
The advantage of less-expensive debt is what’s likely to get companies to take out loans with banks again.
Adapting to post-SVB world
Existing players and new entrants such as HSBC and Stifel, which have both moved quickly to build venture debt practices by hiring senior professionals from SVB, are starting to adapt their credit policies for the new landscape after the bank’s failure in March.
Some banks are easing deposit requirements by backing off mandates that venture debt clients keep 100% of their cash at the institution. After customers were frozen out of accounts at SVB and Signature Bank, many companies now insist on spreading their deposits among more than one bank.
Such requirements are still in flux across the industry, but they’re unlikely to fall below 51%, said Troy Zander, Barnes & Thornburg partner and head of the law firm’s venture debt practice.
“There’s still some reluctance to borrow from banks,” he said. “I think [companies] will get over that in the balance of the year.”
In with the new
SVB’s collapse created an opportunity for rivals to take market share from the bank, which had been the leader in startup lending.
Larger lenders like CIBC and First Citizens Bank, which bought SVB, and smaller players like Bridge Bank and Comerica continue to make loans to startups. But they are likely to see significant competition from HSBC, one of the biggest banks in the world, which has hired dozens of SVB’s bankers in the US and also acquired the global bank’s UK division.
Since HSBC formally launched its venture banking practice in late July, it is still impossible to say how many startups will move their deposits and apply for loans.
Michael Roberts, HSBC’s CEO for the Americas, said his bank can offer clients what many competitors can’t: a global footprint and “more liquidity than any bank.”
“I think we can take what I call the best of SVB and marry it with HSBC,” he said.
Roberts declined to specify how much capital the bank has earmarked for venture lending, but he said HSBC plans to lend “no less than SVB.”
SVB extended $6.7 billion in loans to startups in 2022. HSBC will make loans as small as $1 million to Series A startups and beyond, according to Roberts.
Advisory firm Armentum Partners managing partner John Markell said that if HSBC executes its stated goals, it could be very powerful.
Even if bankers manage to take back a share of the venture debt market, it remains to be seen how much they’ll lend to the youngest startups. While many later-stage companies can afford to choose between bank and nonbank lenders, loans made for early-stage startups decreased in 2023.
Meanwhile, lenders are likely to control the flow of early-stage credit, said Scott Orn, COO at Kruze Consulting, an accounting firm for seed- and early-stage startups.
“Funding is so tight that people will borrow what they have access to.”
Featured image by Chesnot/Getty Images
