Startups with venture capital backing seeking for new lenders face higher borrowing prices, onerous restrictions, or even closed doors, potentially stifling their growth. This is because Silicon Valley Bank’s future is questionable.
According to co-founder and CEO Nate Sanders, the artificial intelligence business Artifact has run into a brick block when seeking to obtain finance from multiple major banks. When the bank failed earlier this month, the Salt Lake City business started exploring for alternatives for its multimillion dollar venture-debt arrangement with SVB, initially looking to big banks, he said.
“It’s just clear that they have no interest in discussing venture debt, “Mr. Sanders mentioned a loan in which the assessed value of a venture-backed company is used as security.
SVB offered debt financing on fair terms to private technology enterprises and, as of December, had $74 billion in loans outstanding to new businesses, investment corporations, and other clients.
Once regulators assumed control of SVB, many lenders claim to have noticed an increase in borrowers’ demand. Nevertheless, lenders frequently aren’t prepared to support early-stage businesses the way SVB did, and when they are, their loans are typically smaller, more expensive, and subject to stricter conditions.
Prior to SVB’s failure, the finance markets were becoming more difficult for startups due to rising interest rates and expanding risks in the technology sector. The turbulence in the banking industry will probably lead to a tightening of credit for borrowers, according to Federal Reserve Chairman Jerome Powell on Wednesday.
The CEO of Silicon Valley Bridge Bank has urged customers to stay as federal regulators who established the bridge bank to oversee SVB’s assets look for bidders to purchase them. Yet, many borrowers are seeking for other choices, as are startups who chose not to take out loans. In a poll conducted by venture capital firm NFX in the middle of March, only 3.8% of startup owners stated they would bank with SVB.
When interest rates were lower and the markets were better, many of these companies enrolled in these facilities “Raquel Smith, a lawyer with the law firm Lowenstein Sandler LLP’s debt finance division, made the statement. A distinct market awaits borrowers interested in refinancing SVB loans or searching for new loans, according to the expert.
In recent years, while interest rates were low, venture-backed businesses piled up debt. According to a PitchBook Data Inc. analysis, venture loan agreements in the United States reached $31.2 billion in 2021, up from $13.1 billion five years earlier.
Additionally, many venture capital firms have intervened to support portfolio companies in finding new lenders.
According to Steven Rosenblatt, co-founder and general partner at the venture capital company, Oceans Ventures is working with more than 40 startup owners who are looking for new lending facilities outside of Silicon Valley Bridge Bank.
According to Mr. Rosenblatt, big banks are unaware of the special requirements of businesses with venture capital backing. They lack a support layer for seed and early Series A enterprises with annual revenues under $5 million, “added he. They undoubtedly lack the expertise necessary to underwrite credit lines for these businesses.”
Moreover, nonbank lenders are unlikely to provide companies with terms as flexible as those from SVB.
“SVB was incredibly affordable, “the co-founder and co-chief executive of TriplePoint Capital, a nonbank lender that competed with SVB for venture-debt clients, Sajal Srivastava, said. We have no deposits to support those low-cost loans.”
Due to its lower cost of capital in the form of bank deposits and higher revenue per borrower from its banking products, SVB was able to lend money to borrowers in the initial stages of their borrowing careers at lower interest rates.
According to Mr. Srivastava, TriplePoint charges more for interest and warrant coverage. Since SVB’s demise, TriplePoint has experienced an increase in demand. As a result, it is attempting to lower risk by giving smaller loans, incorporating tougher safeguards like milestones into loan agreements, and rejecting some customers, he added.
As a lender of last resort, we “said Mr. Srivastava.
According to David Spreng, founder and CEO of the venture-debt company Runway Growth Capital, the failure of SVB swung the scale in favour of venture-debt providers. Spreng also stated that “the bar is that much higher for the firms we want to collaborate with.”
Alternatives to SVB, according to several startup founders, are manageable.
As the bank fell, Kyle Henderson, co-founder and CEO of supply-chain technology firm Vizion Inc., said he was finalising a venture-debt arrangement with SVB. He started speaking with a few lenders, such as Brex Inc. and Trinity Capital Inc., in an effort to obtain a line of credit for up to $4 million.
According to Mr. Henderson, Silicon Valley Bridge Bank approached him to express interest in a deal and to relieve him of the onerous condition that he keep all of Vizion’s cash there. But he added that he is considering all of his alternatives.