There are many questions around the implications of Silicon Valley Bank’s (SVB) collapse that won’t be answered for a long time. But there’s one question that many startups and investors are hoping will get answered sooner rather than later: What happens to venture debt?

SVB was one of the larger, if not the largest, providers of venture debt to U.S.-based startups. And now that First Republic Bank has also gone under, that question has spiraled, growing ever more complex.

Many startups rely on venture debt: it’s both a cheaper alternative to raising equity and can serve as a capital tool that helps companies build in ways that equity isn’t great for. For some companies in capital-intensive areas like climate, fintech and defense, access to debt is often the only avenue to growth or scale.

Thankfully, venture capitalists aren’t too worried about the SVB collapse’s impact on venture debt as a whole.

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TechCrunch+ surveyed five investors, all active across different fund sizes, stages and focus areas, to get the inside line on the state of venture debt. And all of them feel that even amidst the turmoil, venture debt will still make its way to the companies that are looking for it — it just might be a little harder for some to get it.

“With the fall of industry stalwarts like SVB and FRB, we suspect access to venture debt to be harder to come by and more expensive, as partners historically considered as “fringe” are not as flexible around factors like scale, or impose stricter covenants. We will see how Stifel, HSBC, and JPMorgan (with FRB) and First Citizens will act in the market,” said Simon Wu, a partner at Cathay Innovation.

Sophie Bakalar, a partner at Collab Fund, said that while the process and planning needed to raise venture debt will change, it is still a fantastic resource for growing companies.

“Venture debt has its advantages, more so than ever before,” Bakalar said. “It encourages founders to build rather than grow, which is a good thing when we think about the innovation that can last for decades.”

But the process and underlying business fundamentals needed to get venture debt are likely to change, several investors believe.

“Our prediction is that venture debt lenders will begin to rely less heavily on what the ‘loan to value’ of a business is, and instead start to focus on capital efficiency, ability to become profitable, etc.,” said Ali Hamed, general partner at Crossbeam.

Read on to learn how the rising cost of capital is affecting venture debt, what investors are doing to educate their startups about raising debt, and which kinds of startups are best suited to this form of financing.

We spoke with:

Sophie Bakalar, partner, Collab Fund
Ali Hamed, general partner, Crossbeam
Simon Wu, partner, Cathay Innovation
Peter Herbert, co-founder and managing partner, Lux Capital
Melody Koh, partner, Nextview

Sophie Bakalar, partner, Collab Fund

How have lending standards changed for startups looking to raise venture debt? (ARR growth, minimum cash balances, etc.)

The immediate answer is that our ongoing economic uncertainty has drastically changed today’s lending market, particularly for early-stage startups looking to raise venture debt, in terms of lending standards and the cost of the debt.

In terms of lending standards, there has been a focus on revenue growth and profitability. Lenders are looking for startups with a track record of consistent revenue growth as well as a clear path to profitability. For unprofitable companies, this also means scrutiny of unit economics, as lenders want to make sure the capital is used for value-accretive investment.

This means that startups with strong annual recurring revenue (ARR) growth rates and high gross margins are more likely to be approved for venture debt no matter the market condition. We have a saying in venture that good startups will always get funded, so there’s always an exception to this rule.

Secondly, we’re seeing lenders place more emphasis on minimum cash balances. Startups are expected to have a certain amount of cash on hand, typically enough to cover several months of operating expenses, to demonstrate their ability to weather any financial storms that may arise.

Today, this several-month emphasis is more like one-year-plus. In addition, in the prior “risk on” market, lenders were more likely to approve “covenant light” structures; in today’s environment, we expect and have seen lenders require stricter covenants.

Lastly, we’re seeing lenders take extreme caution to evaluate startups for venture debt based on the strength of their leadership team. Startups with experienced, proven management teams are seen as less risky than those with less experienced leadership, particularly in a market where there is so much uncertainty. A strong leadership team can vastly reduce [the impact of] a crisis if and when it arises.

In light of new market conditions, are there certain genres of startups that