In the ever-evolving world of technology finance, staying informed about the latest trends and shifts in the landscape is crucial for both investors and entrepreneurs. Recent events not only shed light upon but also brought about significant changes in the world of venture debt, particularly in the European tech ecosystem. The way I see it, these are the main dynamics at play that are currently reshaping the tech lending debt industry:
1. Mitigating Dilution with Growth Debt
One of the most notable shifts in recent times is the decline in venture capital valuations. After reaching an inflated peak, valuations have begun to normalize. This adjustment has made growth debt an attractive option for tech startups looking to mitigate dilution. As a result, there is a growing demand for this asset class, which offers a strategic approach to financing and equity management.
2. The Impact of Rising Interest Rates
Another influential factor affecting the venture debt landscape is the increase in interest rates. As interest rates rise, limited partner (LP) money is gradually flowing away from traditional venture capital. This redirection of funds is causing tech-focused investors to explore alternative investment avenues, including venture debt. This shift in LP preferences is reshaping the funding ecosystem.
3. SVB’s Implosion and the Domino Effect
The sudden and surprising implosion of SVB (Silicon Valley Bank), a prominent player in venture debt for four decades, has sent shockwaves through the industry. SVB’s struggles have shed light on the performance of this asset class, attracting the attention of large banking institutions. This exposure has led to an unmatched wave of acquisitions and market consolidation. SVB’s disappearance created a void in the market which played out in the following ways:
- In Europe, this triggered HSBC’s acquisition of UK assets, which quickly ignited interest from other major banks, including JP Morgan, Stifel, Mitsubishi UFJ, and Deutsche Bank.
- Bootstrap Europe acquired SVB’s assets in Germany, now holding the sole continental European venture and growth portfolio of SVB.
- The acquisition revealed that ex-SVB employees in HSBC and JPM were already working on refinancing SVB’s portfolio. Notably, they focused on private equity-backed tech companies with positive EBITDA, reflecting a shift towards larger loans.
- Kreos’ acquisition by Blackrock is set to reshape the asset class, emphasizing a likely long term focus on larger loans as well.
- Deutsche Handelsbank, once a local competitor in Germany mirroring SVB’s portfolio size, ceased its venture debt activity, expanding the financing gap in the German tech ecosystem.
These developments signal a significant transformation in the venture debt landscape. Debt funding is flowing at the larger end of the spectrum, while the classic €1-10M technology loan segment witnesses a funding gap. As European tech ecosystems adapt to these changes, new opportunities and challenges will emerge. Understanding these dynamics is essential for entrepreneurs seeking funding and investors looking to navigate the evolving landscape.
In the next six months, we can expect further shifts in the European tech lending space as major players solidify their positions and explore new opportunities. Venture debt remains a dynamic and vital part of the tech financing ecosystem, and understanding its current state is key to success in this ever-changing industry.