#63: Venture Debt Down (And 2023 Impact)

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Venture Capital Investing is Down in 2023 (~$40b 2023 EST)

“In 2022, startups raised about $75b from VCs. A number between $30b-55b would imply 30%-60% reduction in the early stage market.” This is the latest prediction from VC Tomasz Tunguz on the Venture Market in 2023.

By investment stage: “The hardest round to raise so far in 2023 is the Series B (all early & mid-stage rounds have fallen to levels not seen for 5-10 years). Q1 volumes by year show broad declines. Seeds peaked at 1500 in Q1 of 2020 falling to 155 in Q1 of 2023. Seeds fell 64%; As 68%; Bs 86% & Cs 80% of last year’s round counts.”

Venture Debt is Down Big-Time (~$20b 2023 EST)

A less well-known but meaningful market is venture debt and it’s down big-time. “A year ago, venture debt financing was at its peak, yet the $32-billion industry rarely made headlines.

“Yet venture debt—any debt financing provided to venture-backed companies by a bank or private lender—has been an indispensable kind of shadow funding for many founders who use it to supplement raising capital from VCs without further diluting their equity stake in the company. When financing rounds were frequent and lucrative in 2021, taking on some debt to accelerate growth didn’t seem like a huge risk to startups or lenders when equity was easy to come by. And the king of venture debt was, of course, Silicon Valley Bank which had $6.7 billion outstanding in venture loans last year, according to Pitchbook-NVCA Venture Monitor. Fast forward to today and, “the state of venture debt is declining,” explained Peter Cohan, a business professor at Babson College.” Lucy Brewster, Fortune

This year, venture debt deal value is at ~$3.5b through Q1, so tracking to ~$14b - a decline of ~$18b from 2022.

What Does it All Mean?

We’re looking at ~$60b less VC capital in 2023. Deal count down ~70%. Many companies that found it easy to raise previously won’t be able to in 2023 or 2024.

The capital that is raised will be more “expensive”, meaning lower valuations for traditional VC and higher prices for venture debt (as cost of capital has increased and traditional providers like SVB pull back).

Jamesin Seidel summed it up well in her recent article on how she’s messaging this with founders at Chapter One:

“Venture funding is slowing down, and startups that received Seed funding during the ‘21/22 bull market are now gearing up to secure their next round of funding — Series-A. To these new startups, the advice from most investors has been clear: cut burn, extend runway, and try to outlast the macroeconomic headwinds.”

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