With the drop in equity venture funding for startups, investors anticipated an uptick in debt funding. However, due to the rising interest rates and fallout of prominent debt lender Silicon Valley Bank (SVB), debt funding raised by U.S.-based startups has averaged $5.5B in the past few quarters. The average value is half the nearly $11B debt capital allocated to startups in Q2 2022, just as the venture funding slump started. Startups in the U.S. availed debt financing worth $5.8B in Q3 2022, $6.0B in Q4 2022, and $5.3B in Q1 2023. In the current quarter to date, U.S. startups have availed debt funding worth $4.2B. While debt funding stagnated in the first quarter, such financings are picking up pace and will increase as the year progresses. "Later-stage software companies are increasingly turning to credit and structured debt solutions to continue to drive growth and play offense pending a broader market recovery and the IPO market reopening," said David Flannery, a senior managing director and president at Vista Credit Partners. During the first half of this year, Vista has provided more than $500M in debt to startups, including Fivetran, Arcadia, Demandbase, and Deepwatch. Flannery adds that Vista has witnessed record credit deployment so far this year. Last week, Fivetran availed a $125M delayed-draw term loan facility from Vista. The new funding arrangement is set up so that Fivetran receives cash in stages at regular periods. Fivetran's CEO, George Fraser, referred to the loan as an insurance policy to avoid being driven "into a corner" the next year or the year after. In 2021, the company raised $565M in equity funding at a $5.6B valuation. Fivetran turned to debt funding as the IPO market remained closed and the firm was unsure about the valuation multiple it could receive at an equity round. In addition to Fivetran, fintech startup Tipalti and e-commerce financier 8fig secured credit facilities worth $150M and $100M, respectively. Tipalti availed the credit facility from JPMorgan Chase Bank and venture debt firm Hercules Capital, whereas 8fig raised the debt from Koch Disruptive Technologies and SVB, now a division of First Citizens Bank. The collapse of SVB in March earlier this year significantly changed the venture debt landscape. Of the $74B worth of loans on its books, 20% was allocated to startups as venture debt. "Silicon Valley Bank was the most prolific financing partner to the growth ecosystem, and the full impact of its failure on the broader technology and financial markets remains unknown," said Flannery. After the downfall of SVB, several other banks realized the importance of alternative financing. SVB's competitors, including HSBC, Stifel, MUFG, Moelis & Co, and JPMorgan Chase, scooped up executives from the struggling bank to bolster their venture debt divisions. Blackstone hopes to lend startups $2B in venture debt over the next few years. Meanwhile, KKR is also in the process of establishing its venture debt division. Last week, Mars Growth Capital, a joint venture between Japanese bank Mitsubishi UFJ Financial Group (MUFG) and Israeli financial firm Liquidity Capital, launched two new venture debt funds worth $400M. |
