When public markets began to sell off earlier this year, VCs urged their portfolio companies to extend their cash runway by any means possible.
As a result, many startups turned to venture debt. But after an initial surge, their appetite for debt has waned in recent months.
In Q2, US startups borrowed $9.7 billion in venture debt, the second-highest quarter on record. But in the third quarter, venture debt deal value fell by half to $4.7 billion, the lowest quarterly volume since Q3 2017, according to our latest PitchBook-NVCA Venture Monitor.
Startups rushed to secure venture debt at the beginning of the downturn and were done with fundraising by mid-year, according to Howard Morgan, chair and general partner at B Capital Group.
"We did a lot of venture debt during Q2 for [our] companies but almost none in Q3," he said.
Another reason for the recent decline in the value of venture debt is the increasingly higher borrowing costs.
In addition to the US Federal Reserve rate hikes, spreads on venture debt jumped on average 150 to 300 basis points for enterprise software and well above 300 basis points for ecommerce and consumer businesses, said John Markell, a managing partner at venture debt advisory firm Armentum Partners.
"Venture debt was relatively cheap in Q2," Morgan said. "Companies have to think a little bit harder now about [raising debt] because it is more costly."
Traditionally, startups take on venture debt as a supplement to their venture capital rounds. The loans are designed for growing, unprofitable companies. Lenders generally evaluate the viability of the startup by working in tandem with VCs.
In recent years, the size of venture loans has grown alongside the VC market, attracting large-scale players that were not previously active in venture debt.
Featured image by Amnaj Khetsamtip/Shutterstock
Related read: Q3 2022 PitchBook-NVCA Venture Monitor
This article originally appeared on PitchBook News