Tech startups find one of their last funding sources shrinking up

Less debt and equity capital for young companies will probably translate to more companies collapsing, said John Haltiwanger, an economist at the University of Maryland. Startups often aren’t profitable and instead focus on growth, and they need a constant drip of money to keep operating. 

Startups’ reduced access to funding has broader implications for the economy. New businesses account for most job creation in the US, Haltiwanger said. Five million such businesses were created last year in the US, according to the Census Bureau.

A question mark for many tech industry watchers is the outlook for Silicon Valley Bank’s venture debt business. A spokesman for First Citizens said SVB’s approach to that lending is unchanged.  

Startups often raise venture debt funding while raising equity. A company might get $20 million of equity in a first round of funding, and Silicon Valley Bank might have offered a $4 million or $5 million line of credit alongside that money, said Kai Tse, co-founder of Structural Capital, which extends loans to late-stage startups. It might have charged around 1 percentage point over the prime rate, while requiring customers to keep their accounts at the bank, helping to boost SVBs deposits and potential fee income. 

While this form of financing has been around for decades, it took on extra importance last year, when the Federal Reserve began tightening rates at the fastest pace in decades to tame inflation. As equity investors have pulled back, it’s unlikely that venture debt lines at younger, largely cash-flow negative companies can get paid back, Libby said.

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

For some privately held startups, the downturn and banking shakeup could make it more difficult to get loans from regular lenders, particularly those without a background dealing with Silicon Valley players. Many lenders are inclined to be increasingly choosy about which companies they finance.    

It’s not clear how bad any slowdown in tech lending will be. There are still banks and other firms providing financing. But many lenders take cues from equity fundraising, where valuations are typically unchanged or lower, said Ted Wilson, a former Silicon Valley Bank vice president who joined Stifel Bank in March. That’s making it harder for companies to borrow, he said. 

‘Shake Out Process’

 

If startup companies do find themselves with less access to credit, the economy may ultimately benefit, said Steve Davis, an economist at the University of Chicago Booth School of Business and a senior fellow at the Hoover Insitution. Capital may flow to better startups, and worse ideas may not get money. 

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