Tech startups find one of their last funding sources shrinking up

Written by Sarah McBride, Abhinav Ramnarayan, Gill R Shah, and Agatha Cantrell

One of the main forms of funding that startups rely on is deflation, which hurts new companies that are already starved for capital.

The amount of project debt, a type of loan that young companies line up to help pay the bills, fell to $3.5 billion in the first quarter, according to PitchBook, the lowest level since 2017. Higher interest rates stymied financing. More expensive for businesses, and one of the largest project lenders, Silicon Valley Bank, faced a bank run that forced government regulators to seize it and sell it.

First Citizens BancShares Inc. says: , Silicon Valley’s bank buyer, said its appetite for project financing has not changed. On a conference call Wednesday, the company’s president said First Citizens is better positioned to serve venture-backed companies now. But many of the largest lenders across the economy are less willing to take risks as economic growth slows.


Companies drove risk lending to record levels last year as revenues were under pressure and other forms of financing dried up. Venture capital declined significantly in equity investments in the second half of 2022, due to higher interest rates and lower market values ​​across the tech industry. By the first quarter of 2023, venture firms had invested $79 billion in startups, less than half of the $178 billion in the previous year, according to PitchBook.

Rising stocks in public markets is trickier, too: There were only $2.5 billion in initial public offerings in the United States in the first quarter, the lowest level in the first three months of the year since 2016, according to data compiled by Bloomberg.

Less debt and equity capital for startups will likely translate into more companies going bust, said John Haltiwanger, an economist at the University of Maryland. Startups are often unprofitable and focused instead on growth, needing a constant trickle of cash to keep operating.

“These companies are very dependent on financing,” Haltiwanger said. “If that funding dries up, they’re in trouble.”

The reduced access of startups to financing has broader implications for the economy. Haltiwanger said new businesses account for most jobs in the United States. Five million such companies were created last year in the United States, according to the Census Bureau.

Debt as well as equity

A question mark for many tech industry watchers is the outlook for the Silicon Valley bank’s project debt business. A First Citizens spokesperson said SVB’s approach to this lending has not changed.

“SVB continues to offer risk debt, along with all other credit facilities previously offered,” the spokesperson told Bloomberg. “The approach and appetite for extending credit to technology and life sciences companies and investors has not changed.”

Start-up companies often pool venture debt financing with capital raising. said Kai Tse, co-founder of Structural Capital, which provides loans to late-stage startups. It may have charged about 1 percentage point on the base rate, while requiring customers to keep their accounts in the bank, which helps boost SVB deposits and potential fee income.

Other lenders specialized in companies that were a little older. In general, the hope has been that the line of credit will be paid off when the company sells itself, said Billy Libby, CEO of Upper90, which provides credit and equity to early-stage companies.

While this form of financing has been around for decades, it took on added importance last year, when the Federal Reserve began tightening rates at the fastest pace in decades to tame inflation. With equity investors pulling back, Libby said, project debt lines at younger, largely cash-flow companies are less likely to be repaid.

“It’s the kind of sponsored company that shouldn’t live as long as I did,” Libby said. “You will see an account.”

This is the fear of many venture capitalists and startups themselves. Publicly traded tech companies lost nearly a third of their value in the US last year, and even with 2023’s gains still short of their peak. In the first four months of 2023, US tech companies announced 114,000 job cuts, on track this year to top the 168,395 announced for all of 2001, an industry record, according to Challenger, Gray & Christmas.

Get to know the companies

For some privately owned start-ups, the economic downturn and banking turmoil can make it more difficult to obtain loans from regular lenders, particularly those without a background in dealing with players in Silicon Valley. Many lenders tend to be increasingly selective about the companies they finance.

“When you’re in a bull market, it feels like easy business,” said Tse of Structural Capital. To properly price risk, “You have to know the companies, you have to spend time with them, you have to have skills that the average commercial banker doesn’t have.”

It is not clear how bad any slowdown in technology lending will be. There are still banks and other companies providing financing. Ted Wilson, a former Silicon Valley bank vice president who joined Stifel in March, said many lenders are taking cues from stock fundraising, where valuations are usually unchanged or lower. He said this makes it difficult for companies to borrow.

“Often there are internal rounds, follow-up rounds, flat rounds,” Wilson said, referring to deals that don’t increase a startup’s valuation or don’t involve new investors. “This is not entirely attractive from a lending perspective.”

shaking process

In Europe, some lenders are trying to increase market share while cutting back on competitors, said Matthias Kreisser, partner at YPOG, a Berlin-based law firm that advises German tech firms and venture firms. At Germany’s Cherry Ventures, which provides seed funding to startups, partner Christian Mermann said over the weekend that SVB was collapsing, and had heard from venture debt funds looking to win more business.

If startups find themselves with less access to credit, the economy may eventually benefit, said Steve Davis, an economist at the University of Chicago Booth School of Business and a senior fellow at the Hoover Institution. Capital may flow to better startups, and bad ideas may not make money.

“The shake-up process is an important force or mechanism by which economics determines what works and what doesn’t,” Davis said.

But in the near term, tighter financing terms could be painful for venture capital-backed companies as they struggle to fund their day-to-day operations.

“There will be a financing crisis in this sector,” said Steve Brotman, founder and managing partner of Alpha Partners, which, together with venture capital firms, invests in growing companies. “It will eliminate a lot of excesses in the system.”