A Brave New World for Venture Debt Financing

Co-authored by Ryan McCartney

Startups are seeking new sources of debt financing following the collapse of Silicon Valley’s biggest lender.

The collapse of Silicon Valley Bank has spurred venture capital-funded growth companies to take a harder look than ever at their cash flows, burn rates, and how much runway they have to profitability. Many of those accustomed to one-stop shopping for cash deposit accounts, cash management, business loans, lines of credit, and a host of other services are by necessity now doing top-to-bottom reviews of their banking and financial relationships.

One funding vehicle especially – venture debt financing – is receiving plenty of attention. Silicon Valley Bank was by far the largest provider of venture loans to the startup ecosystem, with more than $6.5 billion in loans to early- and mid-stage companies in 2022 out of $26.5 billion in total venture debt funding industrywide.

Venture debt financing has long gone hand-in-glove with venture capital fundraising. A less dilutive means of extending your cash runway, venture debt has helped countless entrepreneurs navigate potholes and overcome hurdles as they invest in product development, marketing, and sales growth on the way to profitable operations. Which raises the question: where will cash-hungry startups find venture debt financing now?

Who to Turn to For Venture Debt Financing

The good news is that in recent years an entire industry of venture debt funding sources has emerged. While Silicon Valley Bank was the 600-pound gorilla, there are hundreds of other potential sources of smart capital out there. Here’s what we might expect:

Venture banks will be slow to fill the void. Silicon Valley Bank was a mid-sized regional bank primarily focused on serving entrepreneurial companies and the venture capital firms that support them. Its scale and comprehensive service to the entrepreneurial ecosystem were unique attributes that will likely take others a very long time to mach. While several other regional banks have made efforts to follow Silicon Valley Bank with a focus on technology and life sciences, none so far have emerged as natural go-to alternatives. Your local banker may still be there for you, but the void left by Silicon Valley Bank will require many venture debt borrowers to expand their search to other potential funding sources.

Venture debt funds will proliferate. A significant trend over the past decade has been the rise of venture debt funds, staffed by experts with specific vertical-market expertise. Of the 300+ lenders in our database, the majority are non-banks. Many of these lenders have deep relationships with investors and entrepreneurs in the venture space.

Startups will look beyond one-stop banking shops. Companies that previously depended on Silicon Valley Bank to handle all their needs, including venture debt financing, are now sorting through their options. As we’ve seen, many are taking more control over their cash and, rather than finding the next one-stop shop, seeking out relationships with non-bank lenders.

How to Navigate the New Venture Debt Financing Landscape 

With over 20 years of experience helping cash burning companies source and secure venture debt on terms that work best for both lender and borrowers, we have faced multiple business cycles.

However, many startup CEOs in the current generation of entrepreneurs have never experienced an industry downturn, let alone a crisis of the magnitude sparked by Silicon Valley Bank’s collapse. Those who need to navigate this new landscape are quickly learning the fundamentals of venture debt financing. Here are three ways to get started:

Know your terms. In 2022, as venture capital funding experienced its sharpest pullback in more than a decade, startups found that debt financing was more difficult to secure as well. Term sheets had already tightened, and with the Silicon Valley Bank failure, they are tightening more. It is likely we will see smaller loan amounts than in the past. However, it is important to know that all terms are negotiable. A good advisor can help you decide which terms to accept and which to negotiate.

Know your capital requirements. Be realistic about what’s possible given the current environment. Convince lenders you’ve got a handle on your capital requirements and that you have a detailed, credible plan for use of funds that will help you reach specific milestone goals while making your loan payments. If you start the process early, when you have plenty of cash runway in front of you, lenders are more likely to be reassured that you’re thinking ahead.

Know who you are borrowing from. Seek out lenders who know your business. Word-of-mouth referrals may help you find venture lenders who know the ins and outs of the market you are in. And a good advisor can help you sort through the options and guide you through the process of reaching a deal.

Don’t Be Afraid to Ask for Help

As long as there’s venture capital, there will be venture debt. According to Capital Advisors Group’s Quarterly Debt Market Update, from 2012 to 2020 venture debt financing averaged approximately 15% of the total amount of capital invested by venture funds. We don’t expect that average ratio to diminish. We don’t expect that ratio to diminish.

A good advisor can help find appropriate sources of venture debt and establish a process for making a competitive choice. Advice and assistance with negotiating terms in a competitive bid process may deliver a significant improvement in terms. Equally important, it will help you establish relationships that can last for years with lenders who know you and your business.