SVB Collapse Creates Question Mark for Venture Debt

What does the downfall of Silicon Valley Bank mean for the venture debt sector?

It’s a question asked by a Monday (April 10) report in The Wall Street Journal (WSJ) report, which noted that SVB had helped pioneer the crucial-for-startups venture debt field.

When the Federal Deposit Insurance Corporation took over SVB last month, it sold the bulk of its branches, deposits and loans — including venture debt loans — to First Citizens BancShares, which has also reportedly onboarded the SVB venture debt team. According to WSJ, there are some who see an opportunity here.

“First Citizens has bought the greatest footprint in the tech innovation hub of America,” David Spreng, chairman and CEO of Runway Growth Capital, a venture-debt lender that works with late-stage startups, said in the report. “SVB didn’t fail because it had bad loans; it failed because it had bad assets.”

It’s still not clear how other bank venture lenders will proceed amid a new emphasis on risk management following the SVB collapse, according to the report.

“I think you’ll see a tightening of funding as some regional banks pull back a bit,” said Brian Wayne, director of Aegon Asset Management’s Impact Venture Credit Program, which offers venture debt to climate-tech firms.

The report follows news from last week that funding for U.S. tech startups had fallen 55% during the first quarter of the year, with venture capital (VC) outfits scaling back the number of investments they’re making, as well as the size of those deals.

“The whole market is taking much more caution toward investment,” Kyle Stanford, a Pitchbook venture capital analyst, said at the time. “It’s not going to be easy for companies to raise capital even if they’re growing at a pace they set in their last round.”

This challenging environment has led to a greater focus on belt-tightening, which has pushed FinTechs to pivot from growth to profitability.

It’s a strategic move some companies are using will win back investors, although Zeynep Yavuz, FinTech partner at early-stage VC firm General Catalyst, took a different view.

“I don’t think any venture investor wants profitability,” Yavuz, whose firm has backed fast-growing companies like Stripe, Airbnb and Instacart, told PYMNTS. “The quality of the business model, the scale needed to generate positive contribution margins and gross profit margins — that’s what investors really care about now.”