As part of the rapid downfall of Silicon Valley Bank, questions swirled about the future of venture debt and whether startups would be able to access their loans.
Some clarity came Tuesday in a memo from Silicon Valley Bridge Bank, the newly established firm created by regulators to manage the bank.
“We are open for business and are hard at work bringing all systems and solutions back online to support you,” wrote Tim Mayopoulos, CEO of SVBB. “We are making new loans and fully honoring existing credit facilities.”
Silicon Valley Bank was a top provider of venture debt, a specialized loan typically repaid using future venture capital, helping startups fund their growth and bridge the gap between investment rounds.
U.S. regulators on Sunday vowed to fully protect insured and uninsured SVB deposits after the bank collapsed. But it was unclear what would happen to existing lines of venture debt. Some startups with venture debt lines and credit facilities reported losing access to capital or cash flow disruptions.
The update on Tuesday is “great news,” said Aviel Ginzburg, general partner at Seattle VC firm Founders’ Co-op. But as an investor, he remains cautious given the evolving situation with SVB.
“Would I tell a portfolio company to prioritize exploring a loan with SVB over another bank at this moment? Absolutely not,” he said.
In many respects, the situation is still in flux, and the outcome will depend in part on which investors or institutions end up with Silicon Valley Bank’s assets through an auction reportedly underway as part of the FDIC receivership.
Venture debt lending has been on the rise. Last year’s second quarter was the second-largest quarter in terms of total venture debt value over the past decade, according to PitchBook data.
Early-stage founders use venture debt to retain ownership control and avoid the risk of a down-round, when cash is raised at a lower valuation than a previous round. It also helps founders avoid selling equity at valuations which they expect to exceed in future rounds.
Seattle startups such as Lexion, Wrench, Kevala, Docusmart and Icertis have used Silicon Valley Bank for venture debt.
Ginzburg said the hardest conversations he’s had recently have been with startups that have built their models around having access to lines of credit. SVB’s collapse coincides with a sluggish venture capital market; funding to Pacific Northwest startups through the first two months of 2023 are down 80% year-over-year.
“This is a double-whammy that is going to have reverberations throughout the ecosystem,” Ginzburg said on a special episode of the GeekWire Podcast.
Some tech leaders expressed concern about the longer-term viability of venture debt.
“Many startups are waking up today to find that their runway is much shorter than they expected without that venture debt,” former Zillow CEO Spencer Rascoff said on Twitter Monday. “Shorter runway = less hiring, less spending, less growth.”
Rascoff added: “Venture debt is dead. SVB was by far the biggest provider of venture debt to startups and that product is dead for while.”
SVB was involved in at least 75 funding rounds last year, primarily focused on venture debt. That amounted to around $6 billion deployed, according to data from Crunchbase and PitchBook. The bank has nearly $15 billion in venture debt as part of its assets, PitchBook reported.
Some experts believe that these loans will transfer to SVB’s eventual acquirer, similar to the process when a mortgage lender goes bankrupt and is acquired by a new bank. Existing venture debt facilities and other credit lines will likely remain intact until they reach maturity, experts said.
It’s uncertain if SVB’s acquirer will continue the venture debt lending operations to the same degree as SVB.
But whoever buys SVB’s loan book may keep the venture debt operation humming, using it to further their exposure to tech, said Matt Wang of Pioneer Square Labs.
“Maybe someone else will step in and be as competitive,” said Hope Cochran, managing director at Madrona Venture Group. “But if things like [venture debt] aren’t as available, you just think about your cash differently.”
Minh Le, the longtime market manager for Silicon Valley Bank’s Washington and Western Canada region, told GeekWire in January that the bank was seeing “as much velocity as I’ve seen in the last decade” from entrepreneurs.
“I am very sorry for how things have played out and the uncertainty you’re dealing with now, and the impact on your work,” Le wrote on LinkedIn this past weekend.
An excerpt from an article on Silicon Valley Bank’s website now comes with a tinge of irony, given the events of the past week.
“Many players come and go in the venture debt market, so make sure that whomever you are talking to is a long-term player,” the article said. “When a bank decides one day that it is no longer interested in lending venture debt, it can wreak havoc on your business.”
