Venture lending's big bounce, or just a mirage?
Pitchbook declared 2024 a record for US venture debt funding at $50B
And…BDC filings show a 34% surge in funded venture loans year-over-year
But adjusting for late-stage AI lending, the overall picture is likely more bleak
Adjusted, the innovation lending market is mostly flat vs 2023, and remains depressed vs ’21 / ’22 levels
Drilling deeper, just two venture lending BDCs drove nearly all of the venture BDC growth in 2024, while others stayed in a slump, hampered by portfolio distractions, ownership transitions, tighter credit boxes, or capital instability
Of note, rates have come down, particularly for stronger borrowers
Coupons for select later stage lending has improved nearly 200bps vs 18 mos ago
Bank pricing has also improved, driven by recent fed rate reductions and a continued competitive environment for companies fresh off equity raises
Headwinds persist…
Regulatory uncertainty and market gyrations hamper lender appetite
Stronger financials are a must - revenue visibility, positive unit economics, and clear profitability pathways; expect continued heightened scrutiny of borrower financials, and covenants or structural protections
Capital cost is still elevated, though easing
While BDC portfolio quality has improved vs a year ago, a large swath of mid-stage companies are shut out of the equity markets and pivoting to profitability; those that over-borrowed in headier times face a financing dead-end
Lender risk appetite is very murky - who's “risk-on” vs “risk-off” vs “completely frozen” is tougher to assess; approaching the lender market with a coordinated effort, a sober plan and multiple loan repayment pathways, is critical
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