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Non-bank venture debt lenders see increase in deals after tough 2023
by Kellie Ell
Venture debt is making a comeback. In the first half of 2023, following the collapse of Silicon Valley Bank (SVB), the volume of deals was just USD 3.5bn — a stark contrast to the more than USD 30bn lent the year before, according to data from PitchBook. But non-bank lenders say optimism is returning.
Venture debt is built on lending to non-profitable, early-stage start-ups that are often burning cash. The capital provides a cushion to these companies and is meant to both complement equity and replace some of it. Firms in high-growth areas, such as life sciences, biotech, healthcare and technology, are the usual recipients.
SVB was the largest bank lender in venture debt. In March 2023, it failed after a series of bank runs. First Citizens Bank agreed to buy it that same month.
Despite the negative headlines, non-bank venture debt lenders say that the failure of SVB created an opportunity for alternative venture specialists, and caused other regional banks to rethink their lending.
“We’ve seen an increase in deal flow over the last two years as banks have backed off a little bit. There’s a record amount of dry powder for venture capital sitting there,” says Kyle Brown, chief executive officer at Trinity Capital. Venture debt equals about a quarter of the firm’s total deployment.
There’s a record amount of dry powder for venture capital
Kyle Brown
Chief executive officer
Trinity Capital
“Companies are staying private longer. And they just can’t get the money they need from a bank alone,” he says, explaining some of the many reasons why the market is growing — even if it is at a slower rate than in the broader private credit space.
Hercules Capital, another lender in the niche, revealed in its latest earnings report that it has done more than USD 1bn in venture funding in the first six months of 2024, on top of USD 1.6bn in 2023.
Last summer, Monroe Capital purchased Horizon Technology Finance Management, the venture debt lending unit of Horizon Technology Finance Corporation. Monroe’s chairman and CEO Ted Koenig says venture debt is an area not all firms can execute well, so there is less competition. Like Trinity, Monroe has hired technology specialists and others skilled in venture debt underwriting.
Koenig also agrees that there’s an opportunity in venture debt. “When those banks left the market, the supply and demand equation in venture debt changed,” Koenig says.
That tailwind may not last though. First Citizens Bank, the new owner of SVB, said: “We continue to originate loans across all segments within the innovation economy and recognise that venture debt can be a critical lever.”
For now, demand still seems to outpace supply, and Monroe has a robust venture debt pipeline, according to Koenig. “We’re seeing a lot of venture debt deals, in biotech, tech firms, drugs,” he says. “Whenever fundraising is hard for these companies, they don’t want to do a highly dilutive fundraise, so it’s much more efficient from a capital structure standpoint to go ahead and do a higher cost venture debt financing.”
The story isn’t just about supply and demand though. “The optimism around the space has much more to do with how good companies have survived,” says Brown.
