WEBVTT - Venture Debt Landscape One Year Post SVB Collapse

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>This is Bloomberg Business Week with Carol Messer and Tim

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<v Speaker 2>Steneveek on Bloomberg Radio. Well, we're kind of going all

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<v Speaker 2>in on private equity today. As I mentioned, we got

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<v Speaker 2>a great lay of the land earlier from Christina Paget,

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<v Speaker 2>head of Leveraged Finance Research and Analytics at Moodies. So

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<v Speaker 2>let's stay with private credit, but go a little more specific.

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<v Speaker 2>We'll talk venture debt. Typically, venture debt is financing that's

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<v Speaker 2>offered for startups that have yet to make a profit

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<v Speaker 2>the equity of existing investors and startup owners. It's not

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<v Speaker 2>diluted with venture debts since, unlike venture capital, those who

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<v Speaker 2>provide venture debt aren't taking a piece of the company.

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<v Speaker 2>For an update, we got back with us David Sprang.

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<v Speaker 2>He's the founder, chief executive officer and chief investment officer

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<v Speaker 2>of Runway Growth Capital. He joins us from Silicon Valley. David,

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<v Speaker 2>good to see you. How are you.

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<v Speaker 1>I'm doing well, Tim, how are you?

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<v Speaker 2>We're doing well. Thanks. I do want to say welcome

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<v Speaker 2>back to Runway Growth. I did see back in July

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<v Speaker 2>you went on leave, so it is really good to

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<v Speaker 2>see you back at the Helm. How is everything.

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<v Speaker 1>Great? Yeah, life is good. It's a very interesting time

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<v Speaker 1>in our business. There's a lot of turmoil happening, particularly

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<v Speaker 1>in the early stages. And you know, we're a year

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<v Speaker 1>now past the demise of Silicon Valley and that part

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<v Speaker 1>of the market is still being figured out. It's not

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<v Speaker 1>where we play. We play in the very very latest

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<v Speaker 1>stage of the market. So the SVB situation hasn't really

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<v Speaker 1>impacted us, and the world continues to be really interesting

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<v Speaker 1>for us, and more and more really good companies are

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<v Speaker 1>staying private longer and needing capital. And as you mentioned,

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<v Speaker 1>debt is a fantastic solution, particularly at the late stage,

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<v Speaker 1>because you don't have to give up any additional equity.

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<v Speaker 2>So what happens in a high rate environment like we've

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<v Speaker 2>been in for the past eighteen months, what happens to

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<v Speaker 2>your business and what happens to how much these companies

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<v Speaker 2>have to pay to access capital.

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<v Speaker 1>Well, first of all, I would point out that it's

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<v Speaker 1>really not a high rate environment. It's higher.

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<v Speaker 2>That's a good point than we were depending on where

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<v Speaker 2>you are sort of in your Silicon Valley life cycle, right.

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<v Speaker 1>Yeah, that's true. But we've had many many unbelievably successful, important,

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<v Speaker 1>impactful companies that have been financed with interest rates of

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<v Speaker 1>five percent. So it's not high relative to history, but

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<v Speaker 1>it's high relative to where we were, and there's certainly

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<v Speaker 1>been a sticker shop and a little time to adjust

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<v Speaker 1>to it, and a requirement that everybody be perhaps a

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<v Speaker 1>little bit creative, and we're doing some of that ourselves.

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<v Speaker 1>But the interest rates going from essentially zero to five

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<v Speaker 1>percent or over five percent in less than two years,

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<v Speaker 1>that is dramatic and impactful and has caused a little

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<v Speaker 1>bit of a sticker shock. But we're working through that,

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<v Speaker 1>and more and more companies are realizing that five percent

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<v Speaker 1>base rate. Although it may be higher than where we

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<v Speaker 1>were two years ago, and shoot, we missed zero interest rate,

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<v Speaker 1>but five percent is still quite low relative to history,

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<v Speaker 1>and quite low relative to the cost of equity, and

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<v Speaker 1>quite low relative to the return on investment that will

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<v Speaker 1>be achieved with the loan capital.

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<v Speaker 3>But the interesting thing about loan capital to the venture

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<v Speaker 3>capital community here companies who have traditionally taken venture debt.

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<v Speaker 3>A lot of these companies had little to no profit

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<v Speaker 3>and in at least equity markets and certainly broader debt markets,

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<v Speaker 3>there seems to have been a much broader set of

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<v Speaker 3>discipline here are there a lot of companies that if

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<v Speaker 3>there are just not making enough money here are being

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<v Speaker 3>turned away by debt markets because we are in a

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<v Speaker 3>different environment now than we happen for the last decade.

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<v Speaker 1>Yeah, it's a really important point. And at Runway, we're

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<v Speaker 1>fortunate that from the very beginning when we founded the

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<v Speaker 1>business in twenty fifteen, we've always focused on half the

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<v Speaker 1>profitability and have looked for companies that had a near

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<v Speaker 1>and a clear path to profitability and and therefore not

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<v Speaker 1>subject to huge amount of downstream financing risk. So that's

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<v Speaker 1>always been an important part of our underwriting. But your

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<v Speaker 1>point is I think very fair and has become a

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<v Speaker 1>mantra in Silicon Valley and in innovation economy and in

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<v Speaker 1>the startup world, is you really need to be thinking

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<v Speaker 1>about your road and your path and your funding path

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<v Speaker 1>to get to profitability. And many companies that raised capital

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<v Speaker 1>in twenty and twenty one and then realized, either through

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<v Speaker 1>the coaching of their investors or however, that it's not

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<v Speaker 1>going to be so easy next time. Valuation is going

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<v Speaker 1>to be lower. We need to make is money last

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<v Speaker 1>they've done a good job of that, perhaps by cutting

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<v Speaker 1>burn or finding other paths. But now they're running out

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<v Speaker 1>of capital and they're coming back, and your point is

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<v Speaker 1>exactly right, many of them are being rejected.

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<v Speaker 3>Right, If many of them are being rejected, I really

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<v Speaker 3>wonder what the environment looks like moving forward, because you know,

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<v Speaker 3>you alluded to the fact a little earlier that we

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<v Speaker 3>were almost one year since the collapse of Silicon Valley Bank.

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<v Speaker 3>I remember the years leading into this kind of boom

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<v Speaker 3>period for Silicon Valley Bank. The largest investment banks in

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<v Speaker 3>the world were nervous about providing debt to venture backed companies,

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<v Speaker 3>particularly ones that were not turning large profits. What does

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<v Speaker 3>the environment look like now, after all the lessons have

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<v Speaker 3>been learned.

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<v Speaker 1>Well, it's important to separate early stage venture lending from

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<v Speaker 1>late stage venture lending, like we do. And I guess

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<v Speaker 1>I would add that a big factor here is the

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<v Speaker 1>regulatory environment. And the runway is a non bank lender

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<v Speaker 1>or a specialty finance company. So we're not subject to

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<v Speaker 1>oversight by the fdi C, you know, or o c

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<v Speaker 1>C or anything like that. We are subject to regulation

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<v Speaker 1>by the SEC. And so your point that lenders don't

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<v Speaker 1>like to lend to pre profit companies is very true,

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<v Speaker 1>and a lot of it is driven by their regulatory oversight.

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<v Speaker 1>And so what you find is that the banks that

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<v Speaker 1>are serving this market and attempting to step in perhaps

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<v Speaker 1>where Silicon Valley Bank played are are not so interested

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<v Speaker 1>in making the loans. They're much more interested in taking

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<v Speaker 1>the deposits and providing other feed generating services, you know,

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<v Speaker 1>like credit cards and foreign exchange and that kind of stuff,

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<v Speaker 1>and don't necessarily want to make the loans. And so

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<v Speaker 1>that's where somebody like us can step in and create

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<v Speaker 1>a very synergistic relationship with a bank. And so like

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<v Speaker 1>we would explore ways to work with HSBC or JP

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<v Speaker 1>Morgan or Silicon Valley Bank or Bridge Bank or Square

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<v Speaker 1>one or any of these banks where they want the

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<v Speaker 1>deposits but not the loan, and we want the loan

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<v Speaker 1>but don't take deposits, so we can partner up nicely

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<v Speaker 1>with them. We don't lend to early stage companies, so

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<v Speaker 1>that's not a fit for us. There there is going

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<v Speaker 1>to be some failures there already have been. There's going

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<v Speaker 1>to be a lot of private to private mergers as

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<v Speaker 1>these companies attempt to find a way to survive. So

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<v Speaker 1>I am. I'm predicting a very challenging year in twenty

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<v Speaker 1>twenty four for early stage companies that don't have a

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<v Speaker 1>really clear path of profitability and don't have equity investors

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<v Speaker 1>that have dry powder and are willing to help them

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<v Speaker 1>get there.

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<v Speaker 2>David, we always appreciate you coming on. It's good to

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<v Speaker 2>have you back on the program with us. David Sprang

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<v Speaker 2>as the founder, CEO in CIO at Runway Growth Capital,

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<v Speaker 2>joining us from Silicon Valley