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It will be harder to raise Venture Debt for a while. August 27, 2008

Posted by jeremyliew in financing, start-up, startup, startups, venture debt.
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Many startups use venture debt to extend their runway beyond the capital that they raised from venture capital investments directly into the company. David Hornik wrote a good overview of venture debt a few years ago, all of which is still relevant today.

Some things have changed since then however. The WSJ reports today on how tightening credit markets are hitting venture debt firms

Providers of loans to start-up and other venture-backed companies are feeling the pinch of the credit problems plaguing Wall Street.

venturewireThe latest is publicly traded venture debt provider Hercules Technology Growth Capital, which on Monday said it secured a $50 million line of credit from Wells Fargo–much smaller than the $250 million in available credit it secured from Citigroup and Deutsche Bank last year. “We’ve been in discussions, and continue to be in discussions [with Citigroup and Deutsche Bank] about continuing the existing facility, but their appetite to expand the facility we have with them is somewhat limited,” said Scott Harvey, Hercules Technology’s chief legal officer…

…Harvey said $50 million is adequate to meet the firm’s needs, and Hercules won’t be looking to add to the facility for at least another three months, but could raise as much as $300 million over the next two years….

…Hercules, which has made about $1.3 billion in commitments to life science and technology companies since its inception in 2003, isn’t alone. This month, Western Technology Investment disclosed that its $125 million credit facility is being pulled by J.P. Morgan Chase and Deutsche Bank. “This is not isolated to us or our industry. Basically, the banks are unwinding the lending process,” said Ron Swenson, Western Technology’s chief executive.

Western Technology still has $220 million in equity remaining in its twelfth and most recent fund, which closed in February 2007.

This tightening in credit will hit some venture debt lenders harder than others. Lenders who can fund venture debt from deposits (e.g. SVB, Comerica) or who do not themselves leverage their equity to make more loans will not be as affected. However, it is likely that all lenders will be more cautious. Additionally, as some firms will have less “dry powder” with which to lend, there will likely be less competition for venture debt providers, meaning that terms for venture debt may get less attractive to startups for a little while.

Comments»

1. Engago Team - September 17, 2008

After the CreditCrunch, there is the TechCrunch.
Instead of getting money from bankers, now you need to get money from customers.

2. tony huang - September 23, 2008

WTI and Hercules not the only game in town. There are about 30 venture debt players in the US. Most of which would be happy to fill the void created by WTI and Hercules.

3. What impact will the credit crunch have on venture financing for startups? « Lightspeed Venture Partners Blog - October 1, 2008

[…] The credit crunch will impact venture debt (already has) so people can’t count on that to extend their runway, so should raise a bit more than they […]

4. Crowley - October 8, 2008

The point is that many many venture debt funds were themselves leveraged. The leverage was provided by mainline wall street institutions and banks that are getting hammered and will pull their credit lines. Make sure to ask any venture debt provider if they are using leverage.


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