In Wake of SVB Collapse, Venture Lending Faces Uncertainty

Lori Ioannou, Wall Street Journal

Banner that says KERV + The Wall Street Journal

The demise of Silicon Valley Bank was a shock for the $32 billion venture-debt industry, a critical source of alternative financing for startup companies.

Since its inception, SVB had been a pioneer in the venture-debt field, and a linchpin for venture-backed startups looking for capital to expand their businesses. Last year, SVB had $6.7 billion outstanding in venture loans, according to PitchBook-NVCA Monitor. Now, many are wondering what SVB’s demise will mean for the venture-debt market.

The Federal Deposit Insurance Corp., which took control of the lender it now calls Silicon Valley Bridge Bank, sold substantially all of its loans, deposits and branches to First Citizens BancShares Inc. in March. The loans were sold at a discount. As of April 3, some $90 billion in SVB’s securities and other assets remained in receivership. Some see the tumult as an opportunity.

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

Now market watchers are waiting to see how active First Citizens will be in venture lending in the months ahead as it integrates SVB’s assets and operations into its own bank. An FDIC spokesman verified Silicon Valley Bridge Bank’s venture loans were part of the loan portfolio acquired by First Citizens.

According to Peter Bristow, president of First Citizens Bank, “Silicon Valley Bank will continue to be a leader in providing venture debt to technology and life-sciences companies as a division of First Citizens. We are enthusiastic about this part of our business.” He says the SVB venture-debt team has been onboarded as employees of First Citizens Bank.

Where will it end?

Another unknown is how skittish other bank venture lenders will be as they focus on risk management in the wake of SVB’s failure. “I think you’ll see a tightening of funding as some regional banks pull back a bit,” says Brian Wayne, director of Aegon Asset Management’s Impact Venture Credit Program, which provides venture debt to climate-tech startups.

“We are in the early days of the SVB fallout, and where it all ends is not clear,” says Troy Zander, partner of Barnes & Thornburg’s San Diego office who leads its venture-debt practice. “That’s why many founders who raised venture debt from SVB are now out looking for replacement venture-debt providers that will refinance these loans.”

Some are turning to other regional banks that specialize in providing venture debt—such as Comerica, Western Alliance Bank and East West Bank—as well as J.P. Morgan’s Innovation Economy Debt Solutions business. Others are tapping nonbank lenders such as Hercules Capital, Horizon Technology Finance and Trinity Capital along with new lenders such as Applied Real Intelligence, or ARI.

“I am seeing 10 times more demand since SVB’s blowup,” says Zack Ellison, ARI’s managing general partner and chief investment officer, who is currently seeking investors for the company’s ARI Venture Debt Opportunities Fund. Mr. Ellison says he expects the fund will total $125 million when it closes by year’s end.

Mechanics of venture debt

Unlike traditional bank financing, venture debt is a loan or line of credit with warrants—rights to buy stock at a specific price in the future. It is often backed by a startup’s assets. It is typically offered by specialized banks or nonbank lenders to help fast-growing venture- capital-backed companies get bridge financing until they are ready to raise another round of venture capital, or sell or go public.

Venture loans are most often structured as three- to four-year term loans with an interest-only period of six months to two years. They typically then amortize over the remainder of the Term.

“Up until now, interest rates on these have been based on the prime rate,” currently 8%, says Mr. Ellison—plus, he says, a credit spread that typically could be up to 4 percentage points above that from a bank and 6 to 8 points from a nonbank lender.

While that has been the rule of thumb, Mr. Spreng says warrant coverage can sometimes be much higher on early-stage deals. He also notes that some lenders including Runway Growth often base these loans on the Secured Overnight Financing Rate, the cost of borrowing cash overnight using Treasury securities as collateral, instead of the prime rate.

Over the past 15 months, demand for financing in the form of venture debt has boomed as venture capitalists have tightened their purse strings. Venture-capital funding in the U.S. fell 29% to $245 billion in 2022 from $345 billion in 2021. Startups looking to shore up working capital ahead of a possible recession have found venture debt a lifeline.

The drop in private-company valuations has also been a driver in the surge of demand for venture debt. According to Kyle Stanford, a senior venture-capital analyst at PitchBook, the median valuations for early-stage startups has fallen 17% since 2021, and it has declined 65% for late-stage, “venture growth” pre-IPO companies.

The trend has meant that startups must give up more equity in exchange for venture capital, and many founders don’t want that equity ownership dilution. That’s what prodded Gary Mittman, founder and CEO of KERV Interactive, an interactive video company powered by AI to turn to Trinity Capital for $4.5 million in venture debt last October. “Since the SVB collapse, many venture-debt lenders have been aggressively pitching me for business every day,” Mr. Mittman says.

The next worry

As private lenders rush in to fill the void in the market, many worry that venture-debt packages will become more expensive and have more onerous terms. “Private-equity firms usually offer venture loans with higher interest rates and often ask for more equity warrant coverage than a bank,” says Jay Jung, managing partner of Embarc Advisors, a strategic finance advisory for startups and small and medium-size businesses in San Francisco.

But how all of this will play out is unknown, especially as interest rates rise and lenders become more risk averse. ARI’s Mr. Ellison says of the current situation: “It’s like throwing sand in the gears of a machine: Even if the wheels keep turning, it will be a harder process for startups to raise money.”

Read the original Wall Street Journal article here.

Recent Posts

November 8, 2023
October 18, 2023
Devin Monds
Head of EMEA Sales

Devin is a dedicated and experienced media sales professional with over 15 years in the digital media space in both North America and EMEA. He most recently headed up the International Team at Adludio, the premier advertising platform for delivering strong creative on mobile devices. Prior to his role at Adludio, Devin worked on the Global Brand Partnerships team at CAA Sports in London, and was International Sales Director at LoopMe where he built out the US West Coast Sales Team from Los Angeles. With a proven track record of new business development and revenue generation, Devin has a multitude of solid relationships with brands and agencies, globally.

He relishes the opportunity to engage with new clients on a daily basis, in order to identify tailored solutions that can drive their desired outcomes. Furthermore, he takes pride in his culinary skills, often experimenting with new recipes and delivering delectable results.

    Brad Quinn
    VP of Publisher Development

    Brad Quinn is the VP of Publisher Partnerships based out of our NYC office. He has over 15 years of experience across Agencies, Publishers and Tech. At KERV, Brad leads the Partnerships team focused on content providers and distributors. He integrates KERV’s tech capabilities across ads and content to create a real‑time interactive/shoppable experience.

    David Knight
    VP of Engineering

    Before joining KERV in 2018, David Knight spent over 31 years building software products for large corporations like IBM and Schlumberger, 3-person “garage” startups and everything in between. He’s spent the last 15 years discovering and refining the tools, development process, and necessary culture that create great Engineering teams capable of meeting the special demands of technology driven startups.

    Dan Bloomfield
    VP of Technical Ad Operations

    After spending time living in New York and working for NBC Universal’s first digital operations team Daniel moved to Austin in 2009 to further pursue ad tech. During the next decade, he built a career working on interactive video first for Sizmek and then Nexstar. He immediately jumped at the idea to work for KERV and was one of the first to join the company in 2017.

    Creed Pettit
    SVP, Head of Partnerships

    Creed Pettit is an entrepreneurial sales executive offering experience in all aspects of solutions selling, team management, negotiation, organizational leadership, go-to-market strategies and momentum driven models. Prior to joining KERV, Creed served as Media & Entertainment Vertical Sales Leader, Global Business Solutions at TikTok.

    Karen Germ
    VP of Marketing

    Karen Germ is a seasoned marketing and communications professional with a nearly 15‑year history serving in leadership roles across the advertising and technology landscape. Most recently, Karen served as OAAA’s VP of Marketing where she implemented industry leading initiatives to elevate and promote the power of OOH for advertisers, agencies, partners and consumers. 

    Ryan Schoenfeld
    VP of Digital Strategy

    Ryan Schoenfeld’s career started as an intern at a smaller digital media agency while attending the University of Texas. Since then, he has spent over 15 years working in the programmatic advertising/video space.

    Bill Roberson
    VP of Media

    Bill Roberson has worked in the digital space for over 17 years, spanning Media Buying, Ad Operations, Analytics and Optimization, Account Management and now Creative.

    Grant Gorton
    VP of Creative

    Grant has been with KERV as VP of Creative for over 5 years, and has worked as a designer and creative director at agencies and media companies for the last 17 years.

    Michael Fleischman

    Michael Fleischman serves as the CFO at KERV Interactive in addition to being an Executive Residence at Progress Partners, a Merchant Investment Bank and Venture Fund. Prior to KERV Interactive, Michael was the CFO and current Board Member at Digital Remedy, a privately-held media execution company supporting agencies, publishers, and brands in navigating the complex adtech landscape of digital success.

    Previous to Digital Remedy, Michael spent 20 years at Cablevision and Rainbow Media Holdings during which he was instrumental in the launch and management of multiple regional sports networks and a number of national cable networks including American Movie Classics, Bravo, The Independent Film Channel as well as the structuring of partnerships with companies including Liberty Media, NBC, Fox/NewsCorp, and MGM. 

    A native of the New York City area, Michael resides with his wife where he enjoys biking, tennis  and spending time with his wife and three adult children.

    Taylor Pate

    Taylor Pate serves as CTO at KERV Interactive. Taylor’s experiences in the advertising and creative industry spans 14. He began his career in 2008, working as a designer, animator and art director specializing in the design and production of interactive art. Early in his career, he created 3D character animations and tools for best-selling video game series The Sims while working at Edge of Reality, who developed video games for Nintendo 64, GameCube, PlayStation and Xbox.

    In 2012, Taylor made the shift to work in-house at an online advertising and media services agency, LIN Digital, where he was promoted multiple times in a four-year span. He worked on a variety of online, interactive projects for clients while also developing and automating internal tools and processes. Taylor then spent the next two years working as the director of engineering at multi-platform digital media company HYFN Local, a division of multi-billion-dollar corporation Nexstar Digital LLC.

    Jay Wolff

    Jay Wolff serves as Chief Revenue Officer at KERV Interactive, leading global revenue and partnerships, in addition to being the Executive Vice President of 212 NYC, New York’s leading organization for the digital advertising industry. 

    Jay’s expertise in revenue and partner growth in the advertising industry spans 19 years. Most recently, Jay served as CRO of Varick Media, and Chief Growth Officer at Boostr, the first end-to-end SaaS revenue management system for media companies. Previously, as Regional Vice President of SambaTV, Wolff built the revenue organization and east coast market from the ground up. 

    Prior to joining SambaTV, Wolff served as Vice President of agency and brand partnerships at PulsePoint; instrumental to the merger of ContextWeb and Datran Media.

    Jay holds a BS in Marketing from Syracuse University and a Certificate of Management from the University of Chicago. He resides in Rye Brook, NY with his wife and daughter, Olivia. 

    Dan Bienenfeld

    Before co‑founding KERV in 2017, Dan Bienfeld spent the previous 35 years founding six start‑ups in various verticals such as publishing, licensing, med‑tech and ad‑tech. Within these companies, he enjoyed two meaningful exits, which provided him with the ability to continue his passion as an entrepreneur. 

    Aside from bringing together ‘Rock Star Talent,’ his main focus has been raising over $50M, primarily for the startups identified above, as well as creating strategic partnerships. Currently he lives in Westlake Village, CA with his wife and two kids. In addition to his entrepreneurial journey, he also enjoys working out, traveling and an addiction to sushi.

    Gary Mittman

    Gary Mittman brings more than 30 years of experience in technology and direct marketing, as well as substantial experience in building startups to exit with creativity and agile development. Before starting KERV, he held numerous top‑ranking leadership roles, including Founder & President of Nami Media (which was acquired by Lin Media/Nexstar Media Group), CEO & Founder of Marina Communications (also acquired), and Vice President of New Business Development, Direct Response at Western International Media (now Initiative Media).

    Gary also brings a decade of experience in the entertainment industry, including managing all booking for New York City’s premiere performance night club, The Ritz, as its Executive Manager and Booking Agent, Executive Producer of the MTV concert series ‘Live At The Ritz’, a Professional Manager at Chappell Music Publishing, and started out as an Assistant to legendary Clive Davis at Arista Records.

    Andi Fenster

    Andi Fenster went into the profession of Human Resources 30 years ago, because she believed from a young age that the way you treat your employees is what you get out of them. Her goal as an HR professional has been to help create the type of work environments that inspire folks to want to come to work. She is also a Management/Leadership/Career Coach and her focus is optimizing humans focusing on the mind‑body connection. 

    “We, each, have tremendous potential and the abilities to level‑up if we choose to understand how to get the support we need to get us there. Helping talent thrive and helping them create success is my reason for doing what I do.”

    Marika Roque
    COO & Chief Innovation Officer

    Marika Roque is a top expert in digital media, data and organizational infrastructures recognized with over 15 years of professional leadership experience. Previous to KERV, Marika worked as the vice president of digital operations for Mass2, a division of multi-billion-dollar corporation Nexstar Digital LLC. Prior to Mass2, Marika served as vice president of digital media activation at LIN Digital.

    Marika has held senior-level positions for leading advertising agencies in the Austin, Texas area including Sizmek and GSD&M. She also spent years in Chicago working for FCB Global and Starcom MediaVest Group. While at Starcom, Marika was recognized for her involvement in the creation of the first agency-side programmatic pipelines and what the industry now refers to as an agency trading desk.

    Marika holds a Bachelor’s in Advertising from The University of Texas at Austin, which she achieved while also participating as a former D1 collegiate athlete.