Venture debt will surf, not drown, in covid-19’s wake

Amidst startup layoffs and drying up deal opportunities in the time of the coronavirus pandemic, venture debt is blossoming.

Amidst start-up layoffs and drying up deal opportunities in the era of the coronavirus pandemic, venture debt looks like a beacon of light reports PDI’s sister publication, Venture Capital Journal.

Venture debt lenders have reported seeing a general pickup in activity throughout Q1 as venture equity investors are tightening the purse strings and the market is putting companies in a squeeze.

Firms are seeing increasing outreach as companies impacted by the market uncertainty look to extend their runway or beef up their balance sheets.

See all of Private Debt Investor’s coverage of covid-19 and its impact here

David Spreng, chairman, CEO and CIO of Runway Growth, said they have seen an uptick from both existing borrowers and new firms.

He said that they had been seeing a gradual increase in requests for venture debt since the market pivoted toward profitability over growth following the WeWork meltdown last year, but that accelerated quickly in Q1 as the general market started to sour.

“March was a dramatic uptick in outreach from VCs to us,” Spreng said.


He said existing VC relationships have reached out about their portfolio companies. In addition, new firms that maybe would have used cheaper bank debt previously are getting in touch as they feel more safe using a venture debt financing at this time. Spreng said this mirrors what he saw in 2000 and 2008.

While Runway Growth can write checks up to $75 million and typically play in the later-stages, early-stage lenders like Lighter Capital are seeing the boom, too.

“VCs are slowing the amount of deals they are doing and that growth capital is still needed,” said Thor Culverhouse, the CEO of Lighter Capital. “The number of originations is going up and the number of applications. This is creating a larger need for growth stage capital.”

Business has been so healthy for the online lender, that the company went ahead with its planned expansion into Canada last week.

“We put forth some plans several months ago,” Culverhouse said. “Frankly there are a number of early-stage companies that will suffer without important growth capital, we just decided to forge ahead and continue on with our plans.”

The expansion will allow Canadian tech companies, that are growing at a 50 to 60 percent year-over-year rate, to access loans that range from $50,0000 to $3 million.

“There is a huge need for capital,” Culverhouse said. “We are going to be a little bit more precise and selective around which verticals we think are going to do well.”

Spreng said Runway will be looking closer at this, as well. They are also tweaking how they ask about downside protection.

“Late last year we would have been asking ‘What if the revenue is below plan by 10, 20 percent will you still be able to pay the debt,” Spreng said. “In today’s environment, what if in the decline you start down 20 percent and go 30, 40, 50 [percent].”

In addition to new business, the two lenders said that they are also focused on helping their existing borrowers as best as they can.

Culverhouse said that Lighter is striving to overcommunicate with its borrowers and help them refinance if they need it. Spreng agreed and added that they anticipate their existing companies will look to add extra cash to their balance sheets.

While the market is changing daily, industry predictions are hard to make. Both investors aren’t sure what the market will look like in Q2 or Q3. But they expect venture debt will fare just fine.

“We are expecting that 2020 will end up being a bigger year than we had expected it to be two months ago,’ Spreng said.