(Fortune) - A year ago, venture debt financing was at its peak, yet the $32-billion industry rarely made headlines. After all, startups are far more excited to announce their latest capital stake from VCs than advertise that they’ve taken on debt.
Yet venture debt—any debt financing provided to venture-backed companies by a bank or private lender—has been an indispensable kind of shadow funding for many founders who use it to supplement raising capital from VCs without further diluting their equity stake in the company.
When financing rounds were frequent and lucrative in 2021, taking on some debt to accelerate growth didn’t seem like a huge risk to startups or lenders when equity was easy to come by. And the king of venture debt was, of course, Silicon Valley Bank which had $6.7 billion outstanding in venture loans last year, according to Pitchbook-NVCA Venture Monitor.
Fast forward to today and, “the state of venture debt is declining,” explained Peter Cohan, a business professor at Babson College.
While First Citizens has acquired SVB's debt portfolio, experts have doubts about whether the regional bank can fill the shoes of the prolific Silicon Valley venture lender. “It is unlikely that First Citizens will have the skill to make new venture loans,” said Cohan.
So who has been rushing to fill the lending hole left by SVB for startups in need of extending their runway? Private, non-bank lenders, who notably charge higher interest rates. “SVB failing was the best thing that could have ever happened for non-bank venture debt lenders,” said Zack Ellison, the managing partner at A.R.I. Venture Debt Opportunities Fund. Unlike banks, which provide a range of services of which loans are just one, the business model of these private lenders is to make money from interest on debt.
By Lucy Brewster
