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Private Debt

Venture debt deals decline 38%, led by SVB’s core market

The earliest stages of the startup world have seen the sharpest contraction in venture lending.

Early-stage venture debt deals have sharply decreased since the implosion of Silicon Valley Bank, which had catered to fledgling startups.

These young companies have been the hardest hit as loan volumes decline across the venture debt landscape. The trend is a sign of lenders imposing higher standards and of startups with uncertain financial prospects failing to qualify for new loans.

In the first six months of 2023, the number of loans for angel-backed and seed-stage companies fell 44% year-over-year, and early-stage loans fell 45%, according to the Q2 2023 PitchBook-NVCA Venture Monitor. That’s compared to declines of 27% and 39% for the late stage and venture growth stage, respectively.

 


Across all stages, startups closed $6.34 billion across 931 venture debt deals in the first half of 2023, compared to $20.07 billion across 1,513 deals in the same period last year.

Time will shed more light on the state of the opaque venture debt market as more deals from the first half of 2023 are collected in the next few quarters. Business development companies, among the most active venture debt lenders, have yet to file their Q2 financial statements. And many startups refinanced following SVB’s collapse in March, which may have provided a bump for new loans.

SVB primarily operated in the early-stage market, sometimes lending to pre-revenue companies as it sought to deepen its relationships with investors. Following its collapse, many lenders vowed to increase efforts to serve startups, but the fate of early-stage loans remains uncertain. First Citizens Bank, which purchased SVB in late March, said in May that it expects the value of the SVB loan book to fall 8% this year to around $61 billion.

“Since SVB’s collapse, lenders have reported that they have not seen other banks stepping up to replace that specific function that made SVB so unique,” said PitchBook analyst Kaidi Gao.

Debt capital remains in high demand among startups, but it has been harder to secure during a slump in VC investment.

Lenders want confidence that startups are on track to receive future investment and that their investors remain committed to the company. For later-stage companies, lenders emphasize a path to profitability or cash flow break-even, when revenues match expenses. As dealmaking and growth slow, startups increasingly fail these tests.

These dynamics have empowered lenders to demand more favorable covenant packages and warrant coverage, in addition to higher interest rates, said David Spreng, founder and CEO of venture debt lender Runway Growth.

High demand and depressed lending levels have allowed lenders like Runway to become more selective and make loans to higher-quality companies, Spreng said.

“We’re being patient,” he added. “The bar is higher in terms of underwriting.”


Featured image by Joey Schaffer/PitchBook News

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