Startups seeking debt funding haven’t seen the taps turned off in recent months, despite the turmoil in the broader credit markets. But as markets tighten, loan amounts could get smaller.
“When I look at the situation, I go back to the dot-com crash and what happened during that period of time,” says Marc Verissimo, chief strategy officer for
Currently, debt accounts for only a small portion of venture funding. There are a few exceptions, such as Tesla Motors, which raised $40 million in debt funding to develop its electric-powered vehicles. However, the typical debt range for a venture-backed company is between $1.5 million and $9 million, according to Verissimo.
But while the credit crunch puts pressure on venture debt lenders to make smaller loans, companies in certain sectors, such as cleantech, are looking for larger allocations. Verissimo says that the bank is evaluating the possibility of extending financing for cleantech companies in large rounds often raised for project financing.
So far, lenders have focused mainly on technology and life sciences companies, and have extended debt financing to cleantech primarily for small, earlier stage rounds.
Still, capital demand is accelerating for late stage deals. Companies developing thin-film solar panels, biofuel production facilities, and electric vehicles, among others, have raised $80-million-plus rounds in recent months. In most cases, those rounds have been funded by venture capital and private firms, strategic investors, and hedge funds. While companies are financing largely with equity today, it’s likely debt will play a larger role in the future, Verissimo says.
Costs aren’t cheap. Venture debt holders commonly pay annual interest rates of between 10% and 12 percent. And there’s typically a set draw-down period before debt starts amortizing.
Yet, for all venture capital’s well-known risks, the venture-lending model hasn’t taken a beating on public markets. Shares of SVB were trading just shy of $60 late last week, up nearly 50% since April.
Meanwhile, the pool of debt funds, and their portfolios, has gotten larger.
California Capital Partners launched its first debt fund, California Capital Investors, with $195 million in commitments in October.
Menlo Park, Calif.-based TriplePoint Capital, launched in 2006 with $310 million. In May, it completed its largest transaction to date, providing $100 million in debt financing to Facebook.
And Horizon Technology Finance Management, a Farmington, Conn.-based venture debt provider, secured $200 million in March from WestLB and Compass Group Investments. Over the past four years, Horizon and its affiliates have committed more than $600 million in venture lending transactions to more than 80 venture-backed life science and technology companies.
At SVB, loans totaled about $4.32 billion in the second quarter of 2008, compared to $4.11 billion for the first quarter. The increase came largely from loans to software, hardware and life science companies.
While it may seem counter-intuitive, Verissano says that there’s logic behind the rise in investment activity amid the Wall Street crisis and a poor economic climate.
“There are venture capitalists that think that in a period of economic recession or downturn, you get your best quality startups,” he says. “They think this is a perfect time to invest.”