![]() ![]() But, going forward, SVB and other banks may refrain from high-risk lending to early-stage startups. SVB has spent years building VC relationships in Silicon Valley to assess the credit worthiness of startups and predict the reliability of their venture backers to step in with cash if needed. Since SVB has been the primary option startups have to access the venture debt credit lines, it is clear that the recent crisis will have a strong impact on the cash runway of startups and the evolution of the venture debt model in general. ![]() In addition to the loan's principal, the company must also pay accrued interest and associated fees. ![]() A key difference between VC funding and venture debt is that the latter is a type of loan that has to be repaid. The non-dilutive nature of venture debt has been a key attraction point for both founders and VCs. This type of bridge financing can be especially attractive to companies that are not yet profitable, as it can provide a source of funding without diluting the ownership stake of existing shareholders. ![]() As an example, a startup that raises a $30 million Series B round from VCs can expect to receive an additional $10 million of funding as venture debt. The term of the venture debt is typically 12-24 months, indicating that it is truly meant to extend the cash runway of the company for the short term and hence help it hone the metrics for the next financing round. So, for the most part, the upside for the lender providing venture debt is the high interest rate, typically 2-3x of the lending rate in the market for other types of loans. It is important to note that equity, if any, given to the lender is an order of magnitude lower in comparison to the equity that the VCs take as part of the funding round. This type of debt has a higher interest rate than traditional loans, and the lender may also receive warrants or equity in the company as part of the deal. Venture debt would typically finance an amount equal to 30% of the VC funding round. But on the other side, it also showcases the growth of venture debt as a formidable asset class in the startup funding ecosystem. On one side, this ascending loan percentage headlines the level of dependence of SVB on the venture debt lines of credit. Within the calendar year 2022, SVB’s PE/VC Equity Lines of Credit amount grew from $38.1 Billion in Q1 to $39.2 Billion in Q2 to $39.5 Billion in Q3 to ending 2022 with $40.5 Billion. More specifically, SVB’s PE/VC Equity Lines of Credit grew from 34.4 Billion out of a total loan amount of $62.6 Billion at the end of December 2021 to $40.5 Billion out of $73.6 Billion total loan by December 31, 2022. SVB’s PE/VC Equity Lines of Credit, together with Private Bank loans, as a part of the total loan mix has increased from less than 5% of period-end total loans in 2000 to 30% in 2009 and eventually to 70% as of December 31, 2022. The last reported financial results by SVB are as of December 2022, so let’s analyze that data. The top lender for providing venture debt to startups has been Silicon Valley Bank (SVB) which has now been acquired by First Citizens Bancshares. Venture debt is a type of financing specialized lenders provide to startup companies that have already received equity investments from VCs. The startups that sell good stories in their initial lifecycle can raise millions of dollars but still have to justify the subsequent fundraising round by mapping up to the market traction-related metrics of Venture Capitalists (VCs). Running out of funds is a top reason why the failure rate for startups is generally high, with some studies suggesting that up to 90% of startups fail within the first five years. Those are the ones who cross the chasm and scale their companies to the summit. Juggling the two is the art of sophistication that very few startup CEOs have actually mastered. It is often said in Silicon Valley that a CEO spends 100% time on growing the startup and, in parallel, spends 100% time on incessant fundraising. The startup’s CEO has an eagle eye on the cash balance of the company while pressing the spending pedal for growth. The startup world, especially in Silicon Valley, is always dealing with a delicate balance. ![]()
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