Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is Bloomberg Business Week with Carol Messer and Tim
Speaker 2: Steneveek on Bloomberg Radio. Well, we're kind of going all
Speaker 2: in on private equity today. As I mentioned, we got
Speaker 2: a great lay of the land earlier from Christina Paget,
Speaker 2: head of Leveraged Finance Research and Analytics at Moodies. So
Speaker 2: let's stay with private credit, but go a little more specific.
Speaker 2: We'll talk venture debt. Typically, venture debt is financing that's
Speaker 2: offered for startups that have yet to make a profit
Speaker 2: the equity of existing investors and startup owners. It's not
Speaker 2: diluted with venture debts since, unlike venture capital, those who
Speaker 2: provide venture debt aren't taking a piece of the company.
Speaker 2: For an update, we got back with us David Sprang.
Speaker 2: He's the founder, chief executive officer and chief investment officer
Speaker 2: of Runway Growth Capital. He joins us from Silicon Valley. David,
Speaker 2: good to see you. How are you.
Speaker 1: I'm doing well, Tim, how are you?
Speaker 2: We're doing well. Thanks. I do want to say welcome
Speaker 2: back to Runway Growth. I did see back in July
Speaker 2: you went on leave, so it is really good to
Speaker 2: see you back at the Helm. How is everything.
Speaker 1: Great? Yeah, life is good. It's a very interesting time
Speaker 1: in our business. There's a lot of turmoil happening, particularly
Speaker 1: in the early stages. And you know, we're a year
Speaker 1: now past the demise of Silicon Valley and that part
Speaker 1: of the market is still being figured out. It's not
Speaker 1: where we play. We play in the very very latest
Speaker 1: stage of the market. So the SVB situation hasn't really
Speaker 1: impacted us, and the world continues to be really interesting
Speaker 1: for us, and more and more really good companies are
Speaker 1: staying private longer and needing capital. And as you mentioned,
Speaker 1: debt is a fantastic solution, particularly at the late stage,
Speaker 1: because you don't have to give up any additional equity.
Speaker 2: So what happens in a high rate environment like we've
Speaker 2: been in for the past eighteen months, what happens to
Speaker 2: your business and what happens to how much these companies
Speaker 2: have to pay to access capital.
Speaker 1: Well, first of all, I would point out that it's
Speaker 1: really not a high rate environment. It's higher.
Speaker 2: That's a good point than we were depending on where
Speaker 2: you are sort of in your Silicon Valley life cycle, right.
Speaker 1: Yeah, that's true. But we've had many many unbelievably successful, important,
Speaker 1: impactful companies that have been financed with interest rates of
Speaker 1: five percent. So it's not high relative to history, but
Speaker 1: it's high relative to where we were, and there's certainly
Speaker 1: been a sticker shop and a little time to adjust
Speaker 1: to it, and a requirement that everybody be perhaps a
Speaker 1: little bit creative, and we're doing some of that ourselves.
Speaker 1: But the interest rates going from essentially zero to five
Speaker 1: percent or over five percent in less than two years,
Speaker 1: that is dramatic and impactful and has caused a little
Speaker 1: bit of a sticker shock. But we're working through that,
Speaker 1: and more and more companies are realizing that five percent
Speaker 1: base rate. Although it may be higher than where we
Speaker 1: were two years ago, and shoot, we missed zero interest rate,
Speaker 1: but five percent is still quite low relative to history,
Speaker 1: and quite low relative to the cost of equity, and
Speaker 1: quite low relative to the return on investment that will
Speaker 1: be achieved with the loan capital.
Speaker 3: But the interesting thing about loan capital to the venture
Speaker 3: capital community here companies who have traditionally taken venture debt.
Speaker 3: A lot of these companies had little to no profit
Speaker 3: and in at least equity markets and certainly broader debt markets,
Speaker 3: there seems to have been a much broader set of
Speaker 3: discipline here are there a lot of companies that if
Speaker 3: there are just not making enough money here are being
Speaker 3: turned away by debt markets because we are in a
Speaker 3: different environment now than we happen for the last decade.
Speaker 1: Yeah, it's a really important point. And at Runway, we're
Speaker 1: fortunate that from the very beginning when we founded the
Speaker 1: business in twenty fifteen, we've always focused on half the
Speaker 1: profitability and have looked for companies that had a near
Speaker 1: and a clear path to profitability and and therefore not
Speaker 1: subject to huge amount of downstream financing risk. So that's
Speaker 1: always been an important part of our underwriting. But your
Speaker 1: point is I think very fair and has become a
Speaker 1: mantra in Silicon Valley and in innovation economy and in
Speaker 1: the startup world, is you really need to be thinking
Speaker 1: about your road and your path and your funding path
Speaker 1: to get to profitability. And many companies that raised capital
Speaker 1: in twenty and twenty one and then realized, either through
Speaker 1: the coaching of their investors or however, that it's not
Speaker 1: going to be so easy next time. Valuation is going
Speaker 1: to be lower. We need to make is money last
Speaker 1: they've done a good job of that, perhaps by cutting
Speaker 1: burn or finding other paths. But now they're running out
Speaker 1: of capital and they're coming back, and your point is
Speaker 1: exactly right, many of them are being rejected.
Speaker 3: Right, If many of them are being rejected, I really
Speaker 3: wonder what the environment looks like moving forward, because you know,
Speaker 3: you alluded to the fact a little earlier that we
Speaker 3: were almost one year since the collapse of Silicon Valley Bank.
Speaker 3: I remember the years leading into this kind of boom
Speaker 3: period for Silicon Valley Bank. The largest investment banks in
Speaker 3: the world were nervous about providing debt to venture backed companies,
Speaker 3: particularly ones that were not turning large profits. What does
Speaker 3: the environment look like now, after all the lessons have
Speaker 3: been learned.
Speaker 1: Well, it's important to separate early stage venture lending from
Speaker 1: late stage venture lending, like we do. And I guess
Speaker 1: I would add that a big factor here is the
Speaker 1: regulatory environment. And the runway is a non bank lender
Speaker 1: or a specialty finance company. So we're not subject to
Speaker 1: oversight by the fdi C, you know, or o c
Speaker 1: C or anything like that. We are subject to regulation
Speaker 1: by the SEC. And so your point that lenders don't
Speaker 1: like to lend to pre profit companies is very true,
Speaker 1: and a lot of it is driven by their regulatory oversight.
Speaker 1: And so what you find is that the banks that
Speaker 1: are serving this market and attempting to step in perhaps
Speaker 1: where Silicon Valley Bank played are are not so interested
Speaker 1: in making the loans. They're much more interested in taking
Speaker 1: the deposits and providing other feed generating services, you know,
Speaker 1: like credit cards and foreign exchange and that kind of stuff,
Speaker 1: and don't necessarily want to make the loans. And so
Speaker 1: that's where somebody like us can step in and create
Speaker 1: a very synergistic relationship with a bank. And so like
Speaker 1: we would explore ways to work with HSBC or JP
Speaker 1: Morgan or Silicon Valley Bank or Bridge Bank or Square
Speaker 1: one or any of these banks where they want the
Speaker 1: deposits but not the loan, and we want the loan
Speaker 1: but don't take deposits, so we can partner up nicely
Speaker 1: with them. We don't lend to early stage companies, so
Speaker 1: that's not a fit for us. There there is going
Speaker 1: to be some failures there already have been. There's going
Speaker 1: to be a lot of private to private mergers as
Speaker 1: these companies attempt to find a way to survive. So
Speaker 1: I am. I'm predicting a very challenging year in twenty
Speaker 1: twenty four for early stage companies that don't have a
Speaker 1: really clear path of profitability and don't have equity investors
Speaker 1: that have dry powder and are willing to help them
Speaker 1: get there.
Speaker 2: David, we always appreciate you coming on. It's good to
Speaker 2: have you back on the program with us. David Sprang
Speaker 2: as the founder, CEO in CIO at Runway Growth Capital,
Speaker 2: joining us from Silicon Valley