Friday, April 12, 2024
Startups

The new rules of venture debt are already being written

The collapse of Silicon Valley Bank (SVB) was not the end of venture debt, but it was likely the end of companies raising venture debt with the same ease that many were accustomed to.

TechCrunch+ recently spoke to five different VCs about the state of venture debt in the wake of SVB and then First Republic Bank’s collapse, and all of them said they don’t think the recent bank failures signaled the end of venture debt. Rather, they expect the process of raising this kind of debt will start to look a lot different.

How will it change? While several investors felt venture debt will remain a cheaper option for founders than equity, all of them agreed that it would get more expensive in the future.

Just how much more expensive, however, is hard to pin down. Sophie Bakalar, a partner at Collab Fund, thinks macroeconomic trends will drive prices up. “Capital markets are certainly changing, so founders should expect this form of capital to rise in price as economic trends increase and the supply and demand dynamics in the market change drastically. We’re telling founders that they should be prepared for the possibility of higher cost of capital now and in the foreseeable future.”

Ali Hamed, a general partner at Crossbeam, has already seen prices climbing, and as that trend continues, he expects lenders will increasingly look for strong underlying unit economics. “Our prediction is that venture debt lenders will begin to rely less heavily on what the “loan-to-value” of a business is, and instead start to focus on capital efficiency, ability to become profitable, etc.,” he said.

The new rules of venture debt are already being written by Rebecca Szkutak originally published on TechCrunch

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