How Venture Debt Lenders Are Currently Assessing Opportunities

As we enter the back end of the year and recession worries continue, we wanted to give our clients and partners an in-depth view of how venture debt lenders are behaving in light of the potential economic slowdown. 

As uncertainty continues, lenders are being more cautious in their underwriting approach due to lower valuations and the risk of companies not executing on future equity raises or being able to exit through IPO or acquisition. This is leading lenders to re-assess how much debt companies are getting and how the terms are impacting their cashflow over the next several quarters.

That said, lenders still have a TON of capital. Over the past 18 months, for many startups, debt has been the less favored avenue for raising capital due to overly inflated equity valuations that companies simply could not turn down. This hard lean into equity capital via VCs (or other investor sources) has led to a cash pile-up in the debt markets. Lenders still need to deploy that capital. As valuations continue to fall and equity terms get less and less favorable for founders, securing debt financing has once again become an attractive option. The good news is lenders are eager to put their money to work for the right opportunities.

One of the biggest areas lenders are focusing on when determining whether to lend to a company is cash management. Companies that are still utilizing the “burn aggressively to grow at all costs” methodology are not the opportunities that lenders are putting their money into right now. Lenders want to see that a company has the ability and the know-how to manage its cash effectively. This means that with debt coming onto the balance sheet, they want to see that there’s at least a path to reach cash flow positive. Companies that are looking to add additional capital via the debt markets need to show that they can manage cash responsibly and build towards profitability.