The failed Silicon Valley Bank was the largest issuer of venture debt for startups.
Los Angeles Times via Getty Images
The startup borrowed, so it didn’t have to give up its equity. After the collapse of his SVB, the market leader, they should expect higher interest rates and fewer transactions in the near future.
I2017, When David Rabie first launched Tovala, a combination smart oven and food delivery service, the idea seemed a little strange. Then the pandemic hit and the idea spread. He raised about $100 million for his Chicago-based business, and instead of selling part of the company, he borrowed his multi-million dollar venture debt from Silicon Valley Bank. This has allowed him to expand his Tovala, which now has 350 employees and his three food facilities in Illinois and Utah.
“SVB lent us money when the business was very unprofitable and in the early stages,” says Rabie. Forbes. “If SVB didn’t lend me the money in the Series A, a lot of things would have been different.” [venture-funding round]No other bank was willing to do that. “
Rabie is just one of many entrepreneurs who have borrowed venture debt from Silicon Valley Bank. Silicon Valley Bank is the failed bank that has been the largest issuer of venture capital-backed debt financing for startups. By 2022, he will reach $32 billion, according to the Pitchbook-NVCA Monitor, more than quadrupling from his $7.5 billion in 2012. His SVB share in that issuance last year was $6.7 billion. Its interest rate ranged from 7% to 12% and added warrants that allowed the lender to take a small stake in the business.
Since the failure of Silicon Valley Bank last weekend, founders and investors have been asking a lot of questions about what will happen to their existing debt. As panic spreads during a bank crackdown, SVB venture debt founders worry that withdrawing money from banks could violate loan covenants that require cash to be kept in banks. Did. Private equity firms, including Apollo Global Management, have reportedly expressed interest, but some have wondered who would buy the debt and eventually become a minority shareholder in their business. “Sending investor updates to a mystery player is a bit awkward,” says Matt Michaelson, founder and CEO of high-end cat food startup Smalls, which took on venture debt with SVB.
More broadly, there is the question of what happens to this fast-growing but largely obscure market during this time of rising interest rates and nervous investors. Jeff Housenbold, the former CEO of Shutterfly and his SoftBank venture capitalist who now runs his own investment firm, Honor Ventures, said: “Vulnerable businesses will be unable to increase their debt.”
Tim Mayopoulos, the new CEO of Silicon Valley Bridge Bank, the name of the entity operating under FDIC trustees, said in a memo Tuesday that the bank would “make new loans and fully respect existing lines of credit“
While this alleviated immediate concerns, it does not answer long-term problems.
To understand how cheap this money used to be, consider the case of Chef Robotics founder and CEO Rajat Bhageria. He took out his $2 million line of credit on his SVB in December 2021 at an interest rate just over Prime, which he did 50 percent higher. At the time the interest rate was 3.25% for him. This is a very low cost of capital for a robotics startup. “Obviously, Prime has changed a lot,” he says. “At that point, it was so low, it was like, ‘How the hell are you getting this?'”
Venture debt has been a big help for robot companies with high capital costs. Bhageria still sees it as a plus, even with the prime rate rising to his 7.75% and higher borrowing costs. “There are a lot of complaints about venture debt,” he says. “They market it as a ‘runway extension,’ a period during which they can continue to operate without raising new capital, but this is not entirely true, because you will soon be making a large monthly payment. Because there will be debt repayments.”
Cat Food CEO Michaelson has raised about $30 million in equity and has a $4 million line of credit with SVB. He says he’s rethinking his company’s funding in the wake of SVB’s failure. When the bank run began, he said, “I was under a lot of pressure from investors to pull money out.” However, he was worried that the loan would default. When he finally tried to withdraw the cash, the transfer failed due to a surge in demand. That was in the past, but his experience made him reconsider.
“I am worried,” he says. “We’re talking, ‘Why don’t we refinance our debt somewhere else?’ The question is, what is the bond market doing? and people who are unlikely to have that debt will probably feel the pressure.
Michelson said he recently heard that the founder of a similarly staged startup got a term sheet for venture debt at an interest rate of 13.5%. “It’s a lot higher than what we’re seeing,” he says. It’s going to be less competitive depending on how valuations move in the venture market.”
Since the collapse of the SVB, non-bank lenders have Seeking to gain more market share in the venture debt market. Arjun Kapur, his partner managing Forecast Labs, his studio, which is part of Comcast NBCUniversal, said:
The big question in the future, as always with funding, is risk and cost. “People are risk averse, so it’s expensive now,” says Hosenbold. “So early on the venture will have less debt and the founders will be more diluted. Venture capitalists will make more money and founders will own less companies.”
