As the stock market cools, startups consider personal loans and mortgages as another financing option.

(PitchBook Chart)

Minh Lee busy.

As the marketing manager for Silicon Valley Bank’s Washington and Western Canada region, he helps investors obtain various lines of credit. And last year, as their spending slowed in response to the economic slowdown, they rushed in new customers.

“We’re seeing as much acceleration as I’ve seen in the last decade,” Le said.

As traditional venture capital grows, many venture capitalists are told to look for alternative investment tools. financing such as business credit or leveraged loans as a means of securing cash and avoiding equity.

Speaking at Perkins Coie in Seattle in October, Bonfire Ventures Principal Tyler Churchill said his company is advising almost all of its affiliates to consider the features of a credit facility.

Startup advisors point to the many benefits of debt: expanding money without compromising, maintaining control over ownership, and avoiding anything that is possible. down-cyclewhen companies receive funds at a lower cost than in previous rounds.

But the debt comes with its own set of specifications: increased financial analysis, strong protection against growth and expenses, and obligations to repay the loan.

Minh Le, Washington and Western Canada market manager for Silicon Valley Bank. (GeekWire File Photo / Todd Bishop)

Still, many startups didn’t consider debt when equity markets were hot last year, he said Zachary Hoeneis a JP Morgan commercial bank that focuses on technology companies.

Last year’s Q2 was the second best quarter in terms of total business debt in the last decade, according to PitchBook details. By the end of the year, the value of debt for technology exceeded 2021 numbers and more than $29 billion was raised on 2,188 deals, according to PitchBook’s Venture-Monitor report .

Clean capitala Seattle-based lending company that offers credit-based financing to startups, doubled its book volume in 2022, marking its best year in history, the CEO said. Melissa Widner. He said that Lighter invests in many companies that are on a normal business path and does not want to risk a flat or down cycle.

The rising debt levels come as the VC market cools. Venture-backed companies raised a total of $209 billion last year, down 36% from the year before, according to a study funded by Ernst & Young.

PitchBook analysts predict that the upward trend will continue in 2023. Equity markets will remain difficult, they wrote, encouraging many startups to “consider corporate debt as a way to increasing their need for equity financing.”

The poor performance of the government’s technology purchases can also be the reason for renewed interest in debt, said SVB’s Le.

Many startups raised their last equity round at a time when revenue was high, relative to the market, increasing their value. With the current market, startups seem to be valued at the same price or lower, resulting in a flat or lower trend.

Startups are often advised to avoid these shows because they can be more intimidating for founders and their employees, Le said. It also encourages their financial support to mark down the company in their portfolio, reporting that decline to their limited partners, he added.

Under the market, it can be “helpful” for startups to generate enough credit to continue operating their businesses, avoiding anything that might go down, said Le.

“Especially during the growth phase,” he added. “It’s very hard to find now. And therefore, pursuing debt seems like an attractive option.”

Several Seattle startups have taken some form of debt in 2022, including: Convoy ($100 million), Coding Dojo ($10 million), and Icertis ($150 million).

JT Garwoodfounder and CEO of medical marketing Bttnsaid his company had received a revolving credit facility from Silicon Valley Bank. The debt instrument helps to pay the expenses of the products, he said, and it uses the company’s debts as collateral.

“We need to make sure that we are not using business funds – which are often used to grow the business – to buy data,” he said. Bttn land $20 million from similar investors Tiger Global and others in June.

Taking on debt pushed Bttn to become more financially viable, Garwood said. Since the lender requires quarterly checks, the startup needs to know when its customers pay for their purchases. In some ways, it has changed the tracking and sales of the business, he said.

“It’s not a bad thing,” he said of the addition of financial barriers. “But you are encouraged to invest in resources that can provide that level of monthly reporting.”

Hoene, the businessmen, said that another aspect that may arise in the payment of debts is the legal agreements that accompany bank loans. He said that it can include the needs of annual growth, high burning, or a low financial balance.

JT Garwood. (Bttn Image)

These conditions can also force a change of thinking on the founders, encouraging them to increase conservation method to grow their business.

Debt instruments are generally only available to companies that have raised equity capital in the past and have a proven track record of success, Hoene said. making it difficult for new or growing start-ups to get this type of financing.

By 2022, more than 40% of all loans placed with business finance companies went to early stage growthaccording to PitchBook.

Debt deals typically account for about 20-to-30% of the startup’s total raised in their most recent series. It’s like a kind of insurance, to get money on rainy days in case it’s difficult or impossible to get money elsewhere, said Hoene.

“It’s more difficult for a bank to come into any kind of commercial debt if you’re under four months of runway,” Hoene said, adding that the legal process is closed. on terms that may last several months.

Business debt lenders earn money by paying interest, origination fees or upfront penalties. The interest rate is usually higher than a regular loan, and it comes with a shorter repayment period (12 to 24 months).

Leave a Comment