A year after the collapse of Silicon Valley Bank—the venture banking icon—market participants have noticed a gradual recovery of the lending market dedicated to serving startup borrowers. But the positive effects have been disproportionately felt by borrowers.
Lenders who were hoping to gain a foothold in the venture debt market have encountered more competition than they anticipated, leading them to loosen debt covenants and lower deal prices.
“It is a very competitive market, given the new entrants and the amount of quality deal flow,” said Brad Ellis, co-head of Stifel‘s venture banking businesses. “This is somewhat surprising, given that the equity market may not be as aggressive as it has been. We are seeing several banks bidding on high-quality deals.”
Ellis added that lenders are providing their preferred borrowers with sizable debt packages that have very limited financial covenants, and credit spreads for these deals are tight.
Stifel was one of the banks champing at the bit to beef up its venture lending operations last year following the SVB meltdown. The St. Louis-based bank has since tripled its venture banking team to 75 people by hiring professionals from SVB, now a unit of First Citizens Bank, and other institutions.
In 2023, according to Ellis, Stifel committed $3 billion in debt funding to startup borrowers and VC funds, accounting for almost one-third of the $10 billion in commitments it has deployed since 2018.
Other market participants have also observed that winter’s grip on the venture debt market has weakened recently. VC-backed companies looking to take on new debt may find the environment more borrower-friendly now than they did a year ago.
“We are back to an environment where a company is getting multiple term sheets,” said Troy Zander, a partner at Barnes & Thornburg.
Zander noticed that venture debt deal volume started to pick up in the fall and has accelerated this year.
Barnes & Thornburg closed five new originations during the last week of February, the first time the firm has done so since the SVB saga, the Federal Reserve’s rapid interest rate hikes, and tightened credit conditions created an unfavorable lending environment for startup borrowers.
“I think that’s indicating the thaw is beginning,” said Warren Biro, another attorney at Barnes & Thornburg.
Not all borrowers out of the woods
Still, the numbers say the venture debt market has not fully recovered.
PitchBook data shows that the total value of US venture debt deals hit $30.2 billion last year, nearly 28% lower than its peak in 2021.
And total deal count dropped to 1,483 in 2023, the lowest since 2017.
Deal volume declined year-over-year across various startup stages, with early-stage companies—those that had raised Series A or Series B rounds—suffering the most.
The venture debt market has certainly revived for performing borrowers. Even so, it is more difficult for businesses facing growth headwinds to take on debt than it was two years ago, said Jeff Bede, who heads the growth capital business at ORIX USA, which lends to mid-to-late-stage companies.
ORIX USA’s growth capital platform took a conservative approach in 2023, originating fewer new venture debt deals in 2023 than in 2021 and early 2022. It focused heavily on supporting its existing borrowers, such as upsizing existing credit facilities or extending the amortization and interest-only period for borrowers.
Companies that recently raised an equity round and are performing well are likely to see favorable terms, as lenders intensely compete for these deals, said Jake Moseley, co-head of venture banking at Stifel.
Lenders are also willing to work with businesses that haven’t done an equity round for a while but have established products, generate revenue and are seeking to raise debt to bridge the funding gap. In these cases, lenders may ask for more structured terms.
On the other hand, companies that have more dated equity rounds, limited traction and have failed to reduce their cash burn are the least preferred borrowers.
That means if you run a company that operates in a ballooning field tied to buzzwords like AI and can attract investor dollars like a magnet, getting loans from lenders should be more of a breeze.
Featured image by Micha Pawlitzki/Getty Images
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