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
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
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.