Venture capital debt in the United States – loans taken out by start-ups to pay their bills – fell to $3.5 billion in the first quarter, according to data from PitchBook. USD, which is the lowest level since 2017. Rising interest rates have made financing more expensive for businesses, and Silicon Valley Bank, one of the largest subprime lenders, has had to contend with a massive withdrawal of deposits that forced government regulators to take it over and sell it.
Silicon Valley Bank buyer First Citizens BancShares Inc. says its appetite for venture capital funding has not changed. During a conference call on Wednesday, the company’s chairman emphasized that First Citizens is now better positioned to serve businesses that rely on venture capital. But as economic growth slows, many of the economy’s biggest lenders are less willing to take risks.
Last year, as revenues came under pressure and other forms of financing dried up, many companies turned to venture capital loans. in the second half of 2022, venture capitalists drastically reduced their investment in corporate stocks, under pressure from rising interest rates and falling market values in the technology industry. Through 2023 in the first quarter, venture capitalists have invested 79 billion in startups. $178 billion, less than half last year’s figure, according to PitchBook data.
It has also become more difficult to raise capital through the sale of stocks in public markets: U.S. initial public offerings totaled just $2.5 billion in the first quarter, according to data compiled by Bloomberg. US dollars – at least for the first three months of the year from 2016.
Fewer loans and equity for start-ups will likely mean a greater risk of failure, said John Haltiwanger, an economist at the University of Maryland. Startups are often unprofitable at first, focusing on growth, so they need a steady flow of cash to keep going.
“These companies are very dependent on funding,” says Haltiwanger. “If that funding runs out, expect trouble.”
Reduced access to finance for start-ups has a wider impact on the economy. Mr. Haltiwanger pointed out that new businesses create the most jobs in the entire United States. According to the Census Bureau, five million such businesses were created in the United States last year.
Debts and equity
Many tech industry watchers have many questions about the outlook for Silicon Valley Bank’s venture debt business. A representative from First Citizens said SVB’s approach to lending has not changed.
“SVB continues to provide subprime loans and all other credit options previously offered,” the bank’s representative told Bloomberg. “Attitudes toward extending credit to tech and life sciences companies and investors, as well as the appetite for credit, have not changed.”
Startups often raise venture debt funding by raising equity. The company can receive 20 million. US dollars of capital in the first round of funding, and Silicon Valley Bank could have offered 4-5 million with that money. dollar line of credit, said Kai Tse, co-founder of Structural Capital, which lends to early-stage startups. He could have charged a higher interest rate of around 1%, forcing customers to keep their bank accounts, helping to increase SVB’s deposits and its potential tax revenue.
Other lenders have specialized in slightly older companies. The line of credit typically had to be repaid when the business was sold, said Billy Libby, CEO of Upper90, which provides credit and capital to start-up businesses.
Although this form of financing has been around for decades, it became particularly important last year when the Federal Reserve began to tighten interest rates at its fastest pace in decades in an effort to control inflation. . As equity investors have pulled back, there are doubts whether subprime loans from start-ups, mostly with negative cash flows, will be able to be repaid, Libby said.
“Basically, it was a mainstay of businesses that shouldn’t have lasted this long,” Libby said. “We’ll see what happens.”
This is precisely what many venture capitalists and startups themselves fear. US-listed tech companies lost almost a third of their value last year – and despite 2023 growth is still below its former peak. In the first four years of 2023 US tech companies reported shedding about 114,000 jobs, which Challenger, Gray & Christmas say means this year will surpass the previous record high of 2001. reached a record high of 168,395 jobs in this industrial sector.
“Get to know the companies”
For some private startups, the economic downturn and turmoil in the banking sector may make it harder to get loans from traditional lenders, especially those with no experience with Silicon Valley players. Many lenders tend to be more selective about which businesses to finance.
“When you’re in a bull market, it looks like an easy business,” said Kai Tse of Structural Capital. To properly assess the risk, “you have to know the companies, spend time with them, have skills that ordinary commercial bankers do not have”.
It’s unclear how much lending to the tech sector will slow. Some banks and other companies still provide financing. But many lenders are looking at capital-raising moves that are stable or declining in value, said Ted Wilson, a former vice president at Silicon Valley Bank who joined Stifel Bank in March. As a result, it may be harder for businesses to borrow, he said.
“A lot of times there are internal rounds, follow-up rounds, rounds that don’t change anything,” Wilson said, referring to deals that don’t add value to the startup or bring in new ones. investors. “From a lender’s perspective, they’re not very attractive.”
“Sifting Process”
In Europe, some lenders are racing to increase market share as their rivals shrink, said Matthias Kresser, a partner at Berlin-based law firm YPOG, which advises German technology companies and venture capital firms. Christian Meermann, a partner at Cherry Ventures, a German start-up that provides seed funding, said he had been approached by venture debt funds keen to win more business opportunities over the weekend when SVB s collapsed.
If startups’ chances of getting credit start to dwindle, it could ultimately turn out to be good for the economy, said Steve Davis, an economist at the University of Chicago Booth School of Business and senior fellow at Hoover. Institution. Capital flows may flow to stronger startups, while poorer ideas may go unfunded.
“The filtering process is an important force or mechanism that helps the economy determine what works and what doesn’t,” Davis noted.
But in the short term, tighter funding conditions could be painful for venture capital-dependent companies as they struggle to fund their day-to-day operations.
“We’re going to have a funding crisis in this industry,” said Steve Brotman, founder and managing partner of Alpha Partners, which works with venture capitalists to invest in growing companies. “This will help eliminate excess from the system.”
Source: The Delfi
