Venture Debt Market Outlook Seems Less Clear At 2023 Halfway Mark

Back in early March 2023, I wrote about how I thought that the current economic environment might drive increased activity in the venture debt arena. That was hardly a contrarian statement, but I did write it before Silicon Valley Bank collapsed – SVB was a big player in the venture debt market – and so what I assumed was going to be a gradual development over the course of 2023 has turned into something of a hot topic in venture circles.

I saw an interesting article from Pitchbook in early June which shone a light on five business development companies that are active in the market. The main takeaway for me was that these firms seem to be generally increasing their net interest income over time. That shouldn’t be a surprise. Most of the loans in the venture debt market are floating rate, and so interest rate rises by the Fed get passed onto their portfolio companies.

And demand should remain strong. Venture debt usually comes at a lower cost of capital for a start-up than new funding rounds. And it’s increasingly difficult for start-ups to source loans from banks, which should not be a surprise, given what we saw in the banking sector in the spring. So, venture debt providers of all types, not just business development companies, are in a strong position when it comes to the terms they attach to any loans that they might make.

It’s difficult to see where next for the venture debt market. However, asset management giant BlackRock bought European private credit manager Kreos Capital in early June. They obviously wouldn’t have done that if they didn’t see a significant opportunity here – BLK is of course huge, so any acquisition would need to somehow move the needle or have a strong long term growth play in order for it to make sense for them. But then this article by TechCrunch suggests that other private lenders aren’t so keen to fill the gap.

Venture capital historians will look back on the first half of 2023 and the dominant theme will be the impact of the challenges in the banking sector on the broader VC market. Which is understandable, because for a few days, there was considerable uncertainty, and panic in many circles. The other trend they’ll talk about is the pull back in fundraising for venture capital funds – Q1 fundraising was down 38%, according to Pitchbook.

The banking crisis looks to have abated now. And fundraising will improve, eventually. But the outlook for the venture debt market, at least, in the short to medium term, seems less clear or murky.