Foley & Lardner March 2024 Newsletter

Friends,

In last month’s newsletter , we drilled down into venture capital financing trends in the equity markets. Due to several contributing factors, venture capital investors reduced their investments and became more strategic about where they allocated their capital.

This month, we reflect on the venture debt market and recent trends we are seeing. In 2023, the aggregate amount of U.S. venture debt capital issuance fell to only $30.2 billion, nearly 28% lower than its peak in 2021, and the total deal count dropped to 1,483 in 2023, the lowest since 2017.

Why venture debt, some may ask? When an emerging growth company raises a round of equity financing from a venture capital firm, a venture debt facility can be secured for an 18- or 24-month period for a minimal commitment fee and expenses. If equity is not available or at the right price, the company can then draw on the debt facility when needed in the amounts required to extend its runway until market conditions enable it to raise, and at a better valuation. Even though venture debt carries a high rate of interest and sometimes comes at a cost of equity warrant coverage, if it succeeds in extending the runway for a company to be able to raise its next round of equity capital when it’s valuation is higher, it can be well worth it. So, instead of looking at it as “credit card debt,” think of venture debt as insurance against market conditions, operational hiccups and unforeseen capital needs, and a way to reduce your company’s net cost of capital to fund operations.

What are we seeing in 2024? Well, one year after the regional banking crisis and the FDIC takeover of SVB and Signature Bank, green shoots are finally sprouting... the Federal Reserve promises three interest rate cuts in 2024, and a whrhe cohort of new players are writing venture debt term sheets at competitive terms. Pitchbook has noted that the venture debt market is continuing its gradual recovery, positively affecting certain start-up borrowers, creating a renewed competitive landscape for venture debt capital.

Late-stage, growth-stage and venture-backed companies will likely find the debt market far friendlier in 2024 than 2023. For seed and early-stage founders without a well-known U.S.-based venture capital investor having recently led a Series A (or later) round, however, securing a debt facility will not likely be an option. Lenders are also doing much more front-end due diligence before a deal closes than when this was considered a cursory step.

As always, do not hesitate to reach out if we can help you brainstorm a legal or business challenge you are facing, or if we can connect you to a potential investor, professional, or entrepreneur.

Natasha Allen , Lisa Conmy , David Kantaros , Jeff Bowman , Von Bryant , Steven Cade , Eric Chow , Brandee Diamond , Maureen Easton , Julie-Anne Lutfi , Nicholas O'Keefe , Taylor Pancake , Kevin Shuler , Glenn Singleton , Lyman Thai , André Thiollier , Melissa Conroy , Alan Pate , Alidad Vakili