Capital Advisors Group Survey Finds Venture Debt Lenders Are Open for Business

The COVID-19 economic slowdown has stopped many startups and emerging growth companies in their tracks, but lenders who provide needed cash to them during good times are still open for business, according to a national survey (Webcast: https://www.capitaladvisors.com/pressrelease/survey-finds-venture-debt-lenders-are-open-for-business/) conducted by Capital Advisors Group. At the same time, lenders have tightened conditions for approval of loans, requiring more assurances that borrowers are positioned to emerge from the crisis with operations and business models intact.

“Of more than 65 lenders surveyed, 92% said they are still closing deals and negotiating new opportunities for young, emerging companies seeking cash,,” said Stefan Spazek, Capital Advisors Group EVP and director of debt placement. “But requirements are more stringent, and typical timelines to close new deals will likely be extended.”

“Even if lenders are much more cautious during the next one to two quarters, the survey indicates that capital will continue to flow now and as we emerge from the pandemic,” Spazek said. “But it’s also clear that most lenders will be, first and foremost, concerned about investments in their existing portfolios.”

Challenges for a multibillion-dollar specialty debt market

Capital Advisors Group has been advising growth-stage companies on debt financing transactions since 2003. The survey targeted specialty lenders who operate in a multibillion market serving venture backed startups and emerging growth and lower-middle-market companies. Many are still in R&D mode or early product development in high-growth sectors, such as technology, biotech, and healthcare.

“Venture debt” is a broad term that refers to loans that help new and emerging growth businesses extend cash life beyond the venture capital they have raised to reach development milestones. Borrowers may not be profitable or even generate revenue in some cases and may need additional financial support to continue product development, rollout new products or reach profitability. Therefore, they often fall outside the boundaries of normal commercial bank lending criteria.

The market for specialty venture debt financing is estimated at between $10 billion to $20 billion a year in the U.S. Lenders include venture banks, public and private funds, credit arms of business development companies (BDCs), private equity and hedge funds, and other specialty finance companies.

Lending continues with more stringent requirements

Capital Advisors Group fielded the five-question survey in early April to determine how specialty lenders are reacting to market disruptions caused by the COVID-19 pandemic. Lenders were queried on whether they are pursuing new deals and funding transactions already in the pipeline, if and how their underwriting philosophies have changed, if they are still traveling and meeting in person to close deals and, if not, whether they are finding alternative virtual communications options are sufficient.

Among the vast majority who are continuing to lend, most said they have adopted more conservative guidelines for lending. Comments from respondents indicated they are requiring that borrowers have plenty of cash on hand as well as supportive equity sponsors and strong enough balance sheets to raise additional equity and debt in the future.

Virtual transactions replace in-person meetings

When asked how disruptive the pandemic has been to their normal course of business, 77% stated more than somewhat disruptive, and 23% stated it has been extremely disruptive. Nearly all (94%) said they are no longer traveling for live meetings to close deals as they once did.

However, the survey also indicated that sheltering at home during the pandemic may be driving some acceptance of virtual deal-making. More than half of the respondents (58%) said video conferences and other means of communication are sufficient to close deals.

The biggest disruption in venture debt lending since 2008

Spazek said that while the COVID-19 pandemic has created a significant disruption in the venture debt marketplace, there is cause for hope that debt financing for growth companies will remain more readily available than in 2008.

“In 2008 and 2009, equity and debt markets virtually froze for the kinds of emerging growth companies we work with,” Spazek said. “But there is now far more capital in this space than there was then. And the COVID-19 crisis is not driven by the same kinds of fundamental breakdowns in the financial sector that we experienced during the credit crisis.