Venture Debt BDCs, Vertical SaaS AI, Crypto

Happy Wednesday,

Welcome back to another edition of the Bigfoot Bi-Weekly Roundup.

This week I’m sharing a bit on:

• Q2 Venture Debt BDC Earnings Learnings
• AI in Vertical SaaS
• Crypto!!! ??

Q2 2023 Public BDC Venture Lender Earnings

Venture debt has been a murkier market since the collapse of SVB in March. Through Q2, just $6.3 billion in borrowing had occurred in the US, well below the pace of the past several years when more than $30 billion was borrowed annually.

1. BDC Activity (New Commitments)

The 5 venture debt BDCs provided $927M in new commitments in Q2, a step up of $167M from Q1’s $760M, bringing total new commitments signed in 1H 2023 to $1.7BN. One lender, Hercules Capital, accounted for 58% of the volume after supplying 69% of Q1’s volume.

The rest of the group signed up $150M more in commitments in Q2 than they did in Q1. This really came from 2 lenders, Trinity Capital and TriplePoint, who jointly increased commitments added from $47M in Q1 to $333M in Q2.

Stacked 1H activity (new commitments, not fundings): Hercules ($1.07BN), Trinity ($262M), Horizon ($240M), TriplePoint ($118M), Runway Growth ($0 reported).

The 5 BDCs have total debt portfolio fair value of $6.6BN as of the end of Q2. The only lender with a quartlery increase in fair value is Trinity with an increase of $170M.

2. BDC Dry Powder and Unfunded Commitments

At the end of Q2, the 5 BDCs had $1.335BN in available liquidity via cash and credit facilities, a tick up of ~$175M from Q1. Hercules represents 50% of this dry powder, roughly the same share as at the end of Q1.

Total unfunded commitments stood at $1.167BN, a decrease of ~$300M from the end of Q1. However, ~$165M was shaved off of Horizon Technology’s previously reported Q1 unfunded commitments amount. I’m guessing they had facilities pay off and those unfunded commitments were released.

Pair the $1.335BN of liquidity with the $1.167BN of unfunded commitments as of the end of Q2 and you have 114% coverage on unfunded commitments, compared to 73% coverage at the end of Q1. Median coverage was 97%. It’s always a bit of a guessing game as to how much of those unfunded commitments will be requested from companies and funded by the lender and how to manage that with new origination efforts, which lead to further unfunded commitments that lenders must add capital to fund (some portion of).

3. BDC Returns/Pricing

“Investment yields have climbed to records or recent high-water marks for the lenders. Coupon rates have propelled the increasing incomes, but even for loans that are prepaid, exit fees prevent the lenders from realizing significantly lower returns from any single loan. Loans originated now will have floor rates, keeping returns high should interest rates lower more quickly than planned.”

The median investment yield of the 5 venture debt BDCs has increased from 12.4% in Q1 2022 to 16.2% in Q2 2023, an increase of 380 basis point (“bps”), or 3.8%. That’s an ~31% uptick in yield achievement in the span of 6 quarters. The bulk of this increase (290 basis points) occurred in 2022 with a further increase of 90 basis points in 1H 2023.

Trinity Capital’s weighted average coupon rate for the quarter was 13.7%, nearly 2.5 percentage points higher than a year prior. Hercules’ loan coupon rate remained level at 12.0%, though this is an increase from 9.0% in Q2 2022. Hercules Capital received nearly $300 million in early payoffs, the highest since the market slowdown began in 2022 and the fourth consecutive quarter-over-quarter increase.

Interestingly, 2 of the lenders (Trinity and TriplePoint) have seen their yields compress over the past 6 quarters, by 10bps and 80bps, respectively. This must be due to realized losses within their portfolio over that timeframe.

4. BDC Losses

Realized losses increased to $41M in Q2 driven by Horizon and Trinity and there are no realized gains to speak of for the quarter, meaning a lack of repaid loans. For the first half of the year, the 5 BDCs have posted a total realized loss of $35M.

Looking at the table below we can see that TriplePoint likely has some realized losses coming down the pike. Trinity’s $24.4M unrealized gain haves potential to offset ~90% of the losses they’ve realized in 1H 2023.

In summary, venture debt BDCs are delivering record earnings along with record dividends to their investors and, as a result, have been able to continue gathering capital, some more successfully than others. However, we can see some continued credit quality deterioration with mounting losses being incurred by some lenders.

You can see my takeaways from Pitchbook’s Q1 report here.

?? Bigfoot Quick Takes ??

Will AI Accelerate Vertical SaaS Adoption?

I’ve long been a fan of Christoph Janz’s (Point Nine) content (his blog). I even had him on a webinar 6 years ago talking about financial modeling for SaaS Founders, still relevant!

In this piece, Christoph provides his thoughts/questions/hypotheses on AI driving vertical SaaS software adoption with some interesting data points on existing vertical SaaS adoption.

Here are some things I pulled out:

On existing vertical SaaS adoption

1. Most businesses adopt new technologies at a painfully slow pace. Currently, approximately 58% of enterprise software spending still goes to on-premise solutions.
2. Current TAM penetration for leading vertical SaaS players (plenty of market left for them or new entrants to address)

1. Vertical SaaS growth challenges and how to combat themThe experience of many vertical SaaS companies is that there seems to be a natural, stubborn limit to how fast you can grow. Each year, only a certain percentage of target customers are “in the market”. One reason is that most companies don’t swap out their “operating system” often…if there’s a limit to how fast you can grow by adding new customers, it’s all the more important to continuously increase ACV by layering on new features and products and to create additional revenue streams

On AI’s potential to accelerate adoption

1. AI omnipresenceFor SMBs still running on pen & paper or Excel & Outlook in 2023, the first SaaS product they adopt will most likely be AI-enhanced, so many of these companies will skip the “pre-AI SaaS” phase.
2. Enhanced product value + accelerated engineering timelinesBefore AI, software mainly helped you streamline workflows so you could spend more time doing your job, or it provided the tools to do the job more efficiently. With AI, software will increasingly do the actual work itself…and a variety of APIs and a fast-growing tooling ecosystem make it much easier to add AI to existing software applications.
3. Time to value decreased + ease of adoption increased…apparently, so far, they [SMBs] didn’t think that the change they’d have to make [to using software] is justified by the value they’d get. If you can use AI to demonstrate the value of your software within the short amount of time and attention that you get from the user, this could be a big unlock.

A star-studded read on crypto graft

Some great (maybe not the right word) stories accompanied by Giselle and Brady, Mr. Wonderful, Bill Clinton, Michael Lewis and, of course, SBF.

Choice quote — the “bullshit asymmetry principle”

“The amount of energy needed to refute bullshit is an order of magnitude bigger than to produce it,” the programmer, Alberto Brandolini, wrote in 2013.

Here’s an offer that actually brings value (pretty no-brainer)

Holdings is a high-yield cash management solution that works alongside your bank and keeps your excess company cash safe and growing. Every dollar in the account earns 100x more than the traditional business savings accounts and is FDIC insured up to $3M.

They’re offering 3 months of no fees. That means 4.82% APY or $4k per million per month.?

To get started:?Go to holdings.io and click on "Get Started"

You start earning 4.82% as soon as funds land in your Holdings Cash Account.

About Bigfoot Capital

Bigfoot Capital offers growth-oriented loans for B2B software companies with $2M- $20M in revenue. We pride ourselves on partnering with companies and their stakeholders to provide a capital partnership that comes with stability and support.

If you operate or support a B2B software business and want to learn more about alternative capital options that preserve equity, get in touch with our team today.

Get in touch