SVB collapse tears gap in start-up loans as rivals position themselves

By 13/04/2023August 8th, 2023No Comments

Translated from German:

Due to the financing crunch, the demand for special loans for start-ups is high. Since the most important provider is gone, prices rise.

Berlin, Frankfurt The electronics rental company Grover, the insurance company Wefox and the cleaning agent company Everdrop have already done it, according to financial circles the hydrogen start-up Sunfire is negotiating about it: It is about special loans to finance company growth, called venture debt.

The recently collapsed Silicon Valley Bank (SVB) was considered a pioneer in this business and was one of the largest financiers in this area until recently. The end now changes the situation. “Because the SVB is no longer on the market in this country, we expect less competition, which should also affect prices,” says Mathias Ockenfels from the early-stage investor Speedinvest.

Start-ups are particularly interested in this financial instrument because the venture capital market has collapsed. Start-ups based in Europe earned a total of 91.6 billion euros last year, a decrease of almost 16 percent compared to the previous year. This is the result of figures from the data provider Pitchbook.

Is venture debt becoming more expensive?

According to experts, the collapse of the SVB should lead to premiums for venture debt loans. “A market participant has said goodbye. As a result, the conditions are tightening,” says Uwe Horstmann, co-founder of the venture capitalist Project A.

“The collapse of the SVB will create a gap,” explains Fabian von Trotha, partner at Dieter von Holtzbrinck Ventures. The investor is an affiliated company of DvH Medien, to which the Handelsblatt Media Group belongs, among others.

Many start-ups use venture debt as a supplement to venture capital to remain liquid between two financing rounds. In addition, the instrument can serve to prevent further dilution of the shareholdings of founders and employees. For traditional venture capital, founders have to give up shares in their company.

However, traditional banks generally avoid young companies, which are usually far from making profits and generating regular sales. Specialized financial institutions or their own venture debt funds, on the other hand, are happy to provide appropriate cash injections to boost the growth of start-ups and to overcome dry spells. The lenders are compensated for the risk with high interest rates.

Vendors like Columbia Lake Partners and Kreos are ready

Rising interest rates worldwide, inflation and the war in Ukraine are currently making venture debt even more expensive. The competition is therefore positioning itself to tap customers of the SVB and earn money from the lucrative business.

The SVB collapse and the uncertainty surrounding bank financing for growth companies are creating new opportunities for other players in the market, said Marten Vading, partner at venture debt fund Kreos Capital. Due to the turbulence, his company received additional requests for growth financing.

Alexander Joel-Carbonell, partner at venture capitalist HV Capital, reports that a double-digit number of promotional emails landed in his mailbox on the weekend the SVB collapsed alone: ​​“Many saw the SVB situation as an opportunity “, he says.

In addition to Kreos, the debt capital providers operating in this country also include Columbia Lake Partners (CLP) and Viola Credit. But KfW and the European Investment Bank (EIB) also grant these special loans. According to CLP Growth, start-ups are looking for new financing partners. The investor is one of the long-standing competitors of the SVB and is now advertising that it has around 300 million euros available for its customers.

In Germany, the venture debt market is still relatively small. According to figures from KfW Research and the Dealroom database, 47 deals with a total volume of EUR 5.5 billion were signed last year. In the previous year, the volume in 33 deals was almost ten billion euros.

For comparison: In 2022, more than $30 billion in loans were made available to venture capital-backed companies in the United States, according to figures from Pitchbook.

According to the EIB’s rather conservative estimates, venture debt finance accounts for around three per cent of annual venture capital volume in Europe. In the USA, the proportion is significantly higher at 15 percent.

No revaluation on venture debt

Experts expect a stronger increase in venture debt deals. The experts at Pitchbook analyze that when it comes to new rounds of financing, only a few start-ups are able to maintain their ratings after the Corona boom phase. This in turn makes venture debt more attractive, since no revaluation takes place when the special loans are taken out. The allure of non-dilutive capital increases tremendously when falling valuations deprive startups of other options, it said.

However, due to the stronger demand, venture debt providers can also screen out applicants. Then the start  ups will have to find alternatives: it’s quite possible that venture capitalists will contribute more equity or that the companies will have to make do with less financial resources, said Urs Cete, Managing Partner of Bertelsmann Digital Media Investments.

Ark Capital is also advertising with a new offer. The Swedish fintech has only been in Germany for a short time and grants loans of up to ten million euros, which are initially free of repayment. “We assume that after the collapse of SVB it will be easier for us to win new customers,” says Ark co-founder Henrik Landgren.
Cooperation: Astrid Dörner