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Venture Debt

Exclusive: Venture lenders turn more conservative on deal terms as startup valuations cool off

In another sign that startup founders are losing leverage, venture debt lenders have begun demanding more restrictive loan terms following a reset in tech stocks prices and startup valuations.

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The era of venture debt lenders offering startups relaxed loan terms may be winding down.

After years in which venture debt specialists, locked in fierce competition for deals, sweetened loan terms to appeal to fast-growing companies, stock market volatility since the start of 2022 is making some lenders more conservative when underwriting deals.

Lenders are reining in loan sizes, shortening interest-only repayment periods, and taking other steps to react to changing market dynamics.

The shift follows recent public market declines in tech stocks and newly public companies, which have created a gap between private and public valuations. That disconnect has pushed some private lenders and investors to reevaluate how eagerly they pursue deals and the valuations they’re willing to accept when they do decide to invest.

“Valuations have started to come under some pressure for companies in the A’s and B’s rounds,” said Max Wolff, a managing partner at Leste Clearway Capital, the venture debt arm of PE firm Leste Group. “Risk is perceived much greater than it was three months ago.”

At the same time, current market conditions are favorable for the venture debt market to have another robust year. Demand is increasing among borrowers facing difficulties in raising the money they need from equity investors, and debt financing helps founders minimize dilution.

The US venture debt market has grown rapidly in the past decade, with total deal value rising from $4.4 billion in 2010 to about $33 billion last year, according to PitchBook data.

The increased amount of capital going toward venture debt deals has led to a run-up in loan sizes, according to investors and lawyers.

“The phenomenon of deal structures getting more favorable to borrowers happened pre-COVID and accelerated during the pandemic, because, to everyone’s surprise, deal activity just went through the roof, no matter if it’s venture capital or venture debt transactions,” said Troy Zander, a venture debt attorney at Barnes & Thornburg.

Last year, lenders signed 182 venture debt transactions larger than $100 million, representing 5.7% of total disclosed deals. That’s an increase from the 96 such deals done in 2020, accounting for 3.4% of the total, according to PitchBook data.


In addition to a run-up in transaction sizes, venture debt was also offered at lower interest rates and with less stringent covenants in the past five to 10 years, reflecting strong investor demand, industry attorneys said.

One example of loosening standards is certain loans that don’t require the borrower to pay back the principal for four or five years, extending the typical 18-to-24 month interest-only period, according to Zander.

Competitive pressures have also led lenders to request a smaller number of shares through warrants and remove covenants that require a borrower to keep a minimum amount of cash on hand or maintain debt ratios at certain levels, Zander said.

However, that trend appears to be reversing as some lenders take a more conservative stance on deals.

More lenders now prefer to offer loans in tranches, allowing the borrower access to the capital in multiple allocations only after meeting certain performance metrics. Some are tightening up covenants by shortening the interest-only period or requiring borrowers to keep more capital on balance sheets to extend their cash runway.

“A lot of venture debt is made on the assumption that the guaranteed repayment for the debt is your next equity round,” Wolff said. “But if lenders start to be a little nervous about that, they will see these opportunities differently.”

The market for late-stage private companies has already seen a decline in deal sizes, according to some venture lenders, and others expect that valuation pressure will trickle down to early-stage startups in the coming months.

“Private valuations will come down because the public market won’t be there,” said Chad Norman, a senior portfolio manager at Avenue Capital Group.

“When valuations get hit, loan sizes become smaller accordingly,” he said.

Featured image by Ekspansio/Getty Images

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    Written by Madeline Shi
    Senior reporter Madeline Shi writes about private equity and the debt markets for PitchBook News. Previously she has written for news outlets including Debtwire, With Intelligence (formerly Pageant Media), Business Insider and CoinDesk. Madeline earned a graduate degree from New York University’s school of journalism and is a graduate of Northeast Normal University in China. She is based in Seattle.
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