The collapse of Silicon Valley Bank (SVB
VB
Even though SVB’s collapse only happened recently—in spring of 2023—the effects are already being documented. According to Pitchbook’s Q2 2023 PitchBook-NVCA Venture Monitor, early stage lending in the first six months of 2023 fell 44% year over year. This was SVB’s core market. It remains to be seen if First Citizens Bank—the new owners of SVB—will continue its lending to early stage startups based on the VC relationships and a multi-product approach.
According to a Pitchbook analyst note from the spring Venture Debt Conference, “Silicon Valley Bank’s collapse has blown open a huge opportunity to take up more market share of venture debt.”
Recently, much has been written about rising inflation, technology capital market retrenchment, and private debt firms tightening lending practices. Having a major source of venture debt no longer available to young businesses and startups just increases funding difficulties. So will this resource continue to be scarce, or are other options already establishing themselves?
Who Is Stepping In To Fill The Void?
While there hasn’t yet been an exact replica of SVB arise, other options for venture debt have experienced growth. It seems that established incumbent venture debt players such as Western Technology Investment, Triplepoint Capital, and Trinity Capital have already benefited from the current market.
According to Maurice Wedergar, CEO of WTI, “It’s hard to imagine there could ever be another SVB. They had a unique position in the market with their ability to offer inexpensive debt coupled with a broad portfolio of banking products.”
Wedergar continues, “It seems unlikely that regulated banks will be allowed to be as aggressive in the future. We have seen a surge in deal flow since March.”
Alongside established players, a fresh wave of private debt firms are entering and taking hold of the market. These firms are disrupting existing generalist venture debt strategies.
As the venture capital industry expanded, it gave rise to new VC firms with specialized niche strategies and industry-focused expertise. In a similar vein, the venture debt market looks to be following a similar pattern.
Strategies For The Private Debt Market
Wheelhouse Partners is an innovative new player in the private debt market. Unlike traditional funds, Wheelhouse primarily focuses on companies that have digital channels for online growth. This can include either direct-to-business or direct-to-consumer. Wheelhouse’s strategy leverages digital marketing expertise and its operating capability to add value to its portfolio. They term it “Modern Venture Debt.”
Wheelhouse Partners founder John Occhipinti says, “We combine more than 40 years lending experience with some of the most talented digital marketing teams in the world. We not only provide capital, but also offer domain and operating expertise to help entrepreneurs grow their businesses.”
Unlike venture capital, venture debt firms cannot afford as many write-offs. Multiple loan write-offs can more acutely impair a debt fund’s overall returns. This is why early-stage lending requires successful underwriting of risk.
“Our approach gives us an information advantage for underwriting,” says Matt Maloney, a 30-year ex-SVB lending veteran and advisor to Wheelhouse. “Unlike generalist firms, we spend as much time with our analyses diving into the companies’ digital dashboards as we do reviewing financial statements.”
Another example is Brex, which entered the venture debt market with additional offerings not restricted to non-dilutive capital. Brex offers software and services expense management, travel, credit card, bill pay and financial modeling. Their tools also give them insight into cash flow and underwriting risk.
Lending Of The Future
The era of relationship lending solely reliant on VC contacts could be a thing of the past. Those poised for success will be those who can offer value to entrepreneurs that extends far beyond monetary support in addition to a deeper comprehension of underwriting risk.
The market is also continuing an important cycle. Businesses that took out loans in 2020 had more plentiful access to VC funding alongside their debt, making repayment easier. With capital markets constricting and fewer lenders in the early stage, many entrepreneurs will be struggling to find continuing funding for loan repayment.
So what does the future hold? Smart new innovative lenders originating loans from the second half of 2023 will likely be top quartile vintage for limited partner investors
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