Well this Summer is officially far more boring than last – no Barbie, no Oppenheimer, no bank meltdowns, no Fed rate moves, and overall a surprisingly stable albeit quite cautious growth and venture debt market.
Lenders are flocking to quality, with well-funded startups receiving on occasion 10 bank debt term sheets (at least 5 too many!) for run of the mill venture debt. This dynamic reflects a resilient venture banking market, fewer sizable equity rounds leading to a smaller fishing pond, and perhaps lower conviction from management teams and boards as to where best to turn for banking and lending needs – thus searching more broadly.
While overall growth and venture debt volume is down, this likely has as much to do with reduced demand from borrowers as it does from tighter lending standards. We aren’t seeing a shortage of capital in the market, however activity at several venture debt BDCs has slowed dramatically since early 2023.
As cash runways have eroded, portfolio quality has taken a significant hit over the past few quarters with most of the venture debt BDCs reporting marked increases in losses and problem (non-accrual) loans, pushing well into the red zone. Prior downturns (2001 / 2009) have shown these portfolio issues tend to be short-lived, assuming they don’t lead to more serious and potentially fatal fundraising issues.
Pricing and risk appetite has generally skewed cautious but has been stable over the past year - varying widely from lender to lender. Borrowers are seeing a touch of pricing improvement from the bank market driven by competitive dynamics.
The much pontificated ‘flood of once unicorns’ accessing the growth debt market hasn’t necessarily materialized – this so far has been a steady stream, not a biblical event. To be sure, companies that have gotten too far over their skis with unsustainable burn rates are simply going the way Fisker Ocean – debt will not save the day.
Here is where we stand:
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