Venture capital update

Banks and other lenders have lowered prices and relaxed terms to make debt more attractive to Silicon Valley startups as they try to compete with strong venture capitalists.

“It can be said that we are all looking for the remaining loan needs,” said Mark Cardioux, chief credit officer of Silicon Valley Bank, which is the largest lender of technology start-ups.

As a lesser-known cousin of venture capital firms, risky debt providers usually provide loans to money-burning startups while buying warrants that can be converted into lucrative stocks in the next few years.

According to a report in 2019, risky debt providers provide approximately US$10 billion in loans each year Polls A small but ubiquitous private technology financing market for the entire industry.

Start-ups usually seek loans after the first or second round of venture capital investment so they can raise funds without reducing founder and employee shareholding. For banks such as Silicon Valley Bank, these loans also create opportunities for potentially lucrative customers.

But this year, a large amount of cheap financing hit Silicon Valley, and venture capitalists and other investors are racing to buy shares in the most promising private companies.

Some risky debt funds have even eliminated “major adverse changes” clauses in the contracts they provide to start-ups, which are designed to protect their capital from major disasters.

According to data from CB Insights, as of July this year, the total investment of venture capitalists was almost the same as that of the whole of last year, and they also obtained smaller shares in popular start-ups.

As a result, banks and risky debt funds began to work harder to secure deals for the most ideal company.

Hutch Corbett, managing partner of debt consulting firm Armentum Partners, said some clients have given up large debt transactions after receiving attractive stock sales offers.

“If the stock is really cheap, you should accept it,” Corbett said. “This is usually our recommendation.”

According to lenders and start-ups, lenders have relaxed the requirements for warrants and extended the interest-only period—a typical feature of risky debt agreements. As financially strong credit investors such as Ares Management and Owl Rock Capital penetrate into the technical field, the size of the offer has also increased.

Vik Gupta, a partner at consulting firm Spinta Capital, said some investors have also accepted looser contracts to win deals. “If you want 12% paper, you can’t run away when things change.”

At the same time, Silicon Valley Bank and other technology-focused banks are also facing pressure from new competitors. According to people familiar with the matter, JP Morgan Chase recently expanded its loans to private technology companies, and commercial bank startup Brex has also begun to provide loans.

Cadieux said that new entrants offer lower prices in an attempt to win business.

“When interest rates become so low, it doesn’t seem to be sustainable,” he said, adding that SVB has not encountered “significant differences” in recent transactions.

Others say that the market has already begun to change. Scott Orn, chief operating officer of Kruze Consulting, said that “all important terms” have recently become looser, and the company provides financial advice to start-ups.

“With the stock market booming, it’s hard to get the money out now,” Aoun said. “This is the kind of thing in 1999.”


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