Slow Cooking
“Slow Cooking” – a cartoon that illustrates how startups shifting to venture debt as a model to raise cash are storing up trouble.
CB Insights recently reported a 23% drop in venture capital funding to startups, which has left many startups scrambling for cash.
Rather than take a hit to their valuations, many startups have turned to venture debt funding with $22.4 billion raised through the end of September.
Venture debt providers (e.g. Silicon Valley Bank) typically only work with premium VC-backed startups and repayment depends on the startup’s ability to raise more capital which will fund growth and also repay the debt.
For example, cybersecurity firm Arctic Wolf had been planning an IPO in 2022, but decided to put this on hold and raise $401M in debt financing for the purpose of extending their options.
The problem with debt in today’s climate is that it requires the debtor to have the visibility to consistently repay the loan as we move into a period of prolonged uncertainty.
Looking back on prior recessions, the number of venture debt deals show a lagging peak to equity deals, but ultimately succumb to the same market forces.
