Debt financing can heat up as venture capital slows

It is too early to announce the demise of the investment as the market is adjusting, but debt financing appears more in the news.

Earlier this week, Corporate Card and Cost Auto Startup Ramp announced an increase of 7 850 million to 1 8.1 billion – $ 550 million in debt financing backed by Citi and Goldman Sachs. Earlier this month, banking services provider Mercury announced it would launch its own loan offer – lending more than 200 200 million this year and up to 1 1 billion over the next two years. Follow the Fantastic Brothers like Brexit to the offering area.

These headlines are against the backdrop of what many see as geopolitical issues, public market turmoil and chronic illness creating uncertainty in the market as many see it as a start-up funding slack. Investors said crunchbase prices have been around 20 percent or less for most startups since late last year.

Such a reduction may explain why borrowers say things are busy.

“Does the conversation change? Yes, in the last month or so,” said Dan Allard, senior market manager at Silicon Valley Bank. “Equal markets are bad.”

what is it?

Venture loans can be defined differently by them even in the industry. Traditionally, an investment loan refers to a loan raised by a VC-backed company – usually in conjunction with raising equity – both reducing the length and length of its run.

Loans – often with less structure and less financial agreement than other types of loans – are used for traditional growth purposes and are often lent to start-up investors and / or where the company is growing.

Now, with the rise of fantasy companies, various types of asset-backed loans, such as “warehouse financing”, have become popular. This type of debt can be secured by the assets and debts that these companies produce – something that the Sass company does not normally have. The borrowed ramp is like this.

However, all loans are similar to giving companies the cash they need while minimizing the share of founders and shareholders. And while investment debt – if raised in conjunction with equity – may not prevent a “bottom-up” in this environment, it can reduce the amount of expensive investment needed as well as lower costs.

“Obviously, over the past few months, negotiations around investment debt have grown,” said Benjamin Woo, CEO of Brexit Asset Management, which launched the company’s debt product last August. “But broadly speaking, it’s something that has been around for decades … it’s a product that people know best.”

Suitable for this market

Brexit currently lends anywhere between څو 1 million and 15 15 million, and rates – depending on the company – range from 4 percent to about 10 percent. Although it has been on the market for less than a year, Wu said the Brexit loan product is close to the 800 800 million mark in terms of lending to a wide range of companies from SaaS to e-commerce. .

With the current market situation, he expects the lending momentum to continue.

“With market volatility … there is strong internal interest,” he said.

David Spring, director of Runway Growth Capital and CEO, also said the deal has been strong so far this year. Runway will lend to companies that have no company support but typically see end-stage customers with revenues of 75 75 million or more.

With the current slowdown in the growth phase in the investment capital, Spring said he has no doubt the debt will have a strong year.

“VCs have a lot of dry powder, but they focus on their‘ big winners ’,” he said. “So many companies may become orphans.

“I look forward to a record year,” he added.

We’ve been here before

This is not the first time the market has been volatile and interest rates on loans have risen.

Allied said investment debt saw significant growth in 2008 as the global financial crisis unfolded. Most recently, investment loans became very popular in March 2020 as the COVID-19 epidemic began. While it wasn’t enough for companies to take out loans, many startups began using their credit facilities because they were eager to keep cash and raise their balance sheets.

“As equity capital becomes more expensive, interest on debt rises,” Allied said.

With rising interest rates and markets that sometimes seem volatile, it is true to wonder if, like equity, debt will dry up.

“Credit markets really get tougher when equities markets get tougher,” Allied said. “But in general, debt capital … more remains open.”

While the framework around investment loans can vary – from no guarantees or contracts to facilities that are heavily built – it can be a worthwhile choice not only for startups looking for hurricane weather but also their Runs and extends the money they collect.

“It’s always been a good tool against the price tag,” he said. “It could prolong the life of this precious commodity.”

Photo: Li-on Dias.