📶 the perfect storm for venture debt

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Good morning 👋

There are 41 days left in 2024. Memorial Day was literally yesterday …

Switching gears - it’s been a big year for venture debt which is crazy to think since it’s been less than two years since the largest venture lender (SVB) went under.

We break down why + what’s pushing companies to choose venture debt in today’s piece.

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When Silicon Valley Bank went under in March 2023, the response from venture people was panic.

Would there be a larger bank run?

Would debt no longer be a viable option for companies?

Would this set off a larger financial collapse?

At the time, all of this seemed possible probable.

Fast forward to today, though, and the opposite has happened: venture debt is more popular than ever.

Why it matters: The void left by SVB didn’t stifle venture debt; it supercharged it.

If we take a larger step back, there is a larger reason why venture debt is up, and that is that the venture growth model is not realistic for most companies.

VCs expect 100%+ YoY growth year after year after year.

Venture lenders, in contrast, value steady cash flow over hockey-stick growth projections.

Add in the regulatory pressure squeezing banks post-SVB, and you can understand why private credit funds have become the go-to option for many growth funds looking for permanent capital.

What happens next: We don’t expect expect this trend to slow down any time soon, although we do expect pricing and terms to tighten as more private lenders start competing for the same amount of deals.

We wrote last week about how venture fund math is changing. The shortage of distributions has created more of an emphasis towards modest returns over moonshot outcomes.

This is another supporting point for that argument.

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🔬 Boost Focus and Productivity: Andrew Huberman posts about the importance of having 2 phones

If you work in VC, you’ve probably thought to yourself more than once …

What am I doing?

You’re not alone.

Most young investors are on an island, and without a network of other investors thinking through the same problems, it’s borderline impossible to do the job well.

That’s why we created our private community, and it’s why thousands of VCs have used it to find signal through the noise.

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Thanks for reading this far and giving us a little bit of your attention this week.

Feel free to unsubscribe whenever this stops becoming valuable to you.

- Clay

Here are the results from our poll question in yesterday’s piece:

Which proptech vertical are you most-bullish on?

🟨⬜️⬜️⬜️⬜️⬜️ Home Equity & Alternative Financing (1)

🟨🟨⬜️⬜️⬜️⬜️ Rental Management (2)

🟨🟨🟨⬜️⬜️⬜️ Eco-Conscious Homebuilding & Improvements (3)

🟩🟩🟩🟩🟩🟩 Streamlining Construction (5)

11 Votes