Earlier this week, venture investors and startups ran from Silicon Valley Bank, a financial institution that started the week solvent and closed it being shut down by regulators. While its failure affects the accounts of startups and venture investors that banked with it, SVB’s demise also has an impact on another service startups frequently used the bank for: venture debt.
SVB has long been thought of as a venture debt leader, and for many the bank’s name is synonymous with venture lending itself. So how could its collapse affect the increasingly hot venture debt market? It depends on who you ask.
For context, more than $31 billion flowed through the U.S. venture debt market in 2022, according to data released Friday by PitchBook. The amount of money startups received through venture debt has remained largely consistent year over year since 2019. But the industry is also hard to track because it is littered with both traditional bank lenders and private players that don’t have to report data in the same way, making it hard to pinpoint its exact size.
Zack Ellison, the founder and CIO at A.R.I Venture Debt Opportunities Fund — a new private venture debt player currently raising its first fund — told TechCrunch that he thinks the SVB fiasco will be prove to be windfall for the market because of SVB’s outsized mindshare in the space. He said he frequently meets people in the industry who don’t even realize they can get that type of loan somewhere else.
Ellison said that he predicts other banks active in venture debt that are similarly sized may start to pull back as they wait to see what happens next with SVB, which could further shrink the pool of potential lenders — at least temporarily.
But not all players will be pulling back, and nonbanking lenders — many of whom are flush with cash — are in a great position to capitalize on the gap SVB leaves. Private lenders that have traditionally focused on venture debt, including Hercules, Western Technology Investment and Runway Growth Capital, may see a flurry of opportunity.
The past year has also seen many of the large private credit stalwarts get more involved with the venture debt sector. KKR has expressed interest in underwriting loans to startups, and Blackstone announced it would put $2 billion toward venture loans. While neither is active yet — and both will likely target exclusively larger loans — they may speed up their entry into the market after this news and can still be an opportunity for larger startups.
New venture players are not a panacea for startups in need of more capital. While debt is often seen as a less expensive option than equity financing, raising debt from a private lender does come with a much higher cost than credit from a bank like SVB.
“This is just getting started,” Ellison said. “It’s going to be very painful and drive up the costs of funding. Debt will become much more expensive. Every financier sees what’s going on and there is a lot more demand for capital than supply.”
But John Markell, a managing partner at Armentum Partners, which helps companies raise venture debt, isn’t feeling the same doom and gloom. He said that while SVB was a sizable player in the venture market, with smaller collateralized loans being their bread and butter, they had outsized impact compared to the actual money they put in the market.
“The short answer is they were a big player, but they were probably a larger influencer in the space” than a participant, Markell said. “I don’t know the exact percentage, but it’s not a meaningful size of the entire market. Most of the market are nonbank lenders that don’t have to report. Blackrock puts out nearly $1 billion a year.”
Markell said that SVB was a really great option for companies that were looking for “vanilla” loans, and that anyone looking for loan products that were different or more complicated was already looking somewhere else prior to this.
The venture debt world is also so opaque, and founders don’t tend to know truly how many options they have for debt financing, he said, adding that while there are only a handful of traditional private venture debt lenders, Armentum has worked with more than 250 sources of debt financing, startups just sometimes don’t know where to look.
Looking ahead, Ellison said it would be unfortunate for people to falsely tie SVB’s problems with their venture debt practice, an asset class with a very reasonable risk profile. But for those looking for debt financing, they are not completely out of options.
“Our phones have been ringing off the hook from Hercules to Runway to HPS to say that they are open for business … they are wide open for business, and they want to lean in,” Markell said.