Experts Predict Venture Debt Lenders to Drive Fire Sales and Startup Shutdowns in 2023

In recent times, the startup landscape has witnessed significant upheaval, particularly with the rise and fall of various companies. The abrupt shutdown of accounting startup Bench last month highlights the precarious nature of startup financing. The company’s lenders called in a loan, forcing the closure. Additionally, the digital freight company Convoy faced similar challenges, resulting in venture lending firm Hercules Capital taking control to safeguard its investments.

The Impact of Recent Startup Failures

Another noteworthy event in the startup ecosystem is the sale of Divvy Homes to Brookfield Properties for approximately $1 billion. Despite the sale, many shareholders were left without payouts. TechCrunch reported on the complexities surrounding Divvy’s lenders, particularly as the company had borrowed $735 million from major banks like Barclays and Goldman Sachs in 2021.

Trends in Startup Funding

The period of 2020 and 2021 saw an influx of funding for startups, often with minimal due diligence. However, many of these companies are now facing the consequences of their high-risk financing. Recent data indicates that the worst may not be over, with predictions suggesting that more startups could fail in 2025. In fact, $41 billion was invested in venture debt across 2,339 deals in 2021, setting a record for that time, according to Silicon Valley Bank.

Challenges Faced by Startups

David Spreng, CEO of Runway Growth Capital, notes, “We’re getting to the end of the rope for a lot of companies.” As lenders grow increasingly concerned about their investments, there’s a trend of pushing startups to consider selling themselves to mitigate losses.

• Many lenders are currently managing troubled companies in their portfolios.
• Excessive debt compared to income can lead to forced sales or foreclosure.
• Startups may need to persuade new or existing VCs to invest more to avoid lender actions.

Investor Reluctance and Market Trends

Investors are becoming hesitant to continue funding startups that are not growing at a pace that justifies their high valuations from previous years. John Markell, a managing partner at Armentum Partners, states, “Right now, there are so many troubled companies. A lot of unicorns are not going to be in business soon.”

The Future of Venture Debt

Spreng predicts that many startups will face tough choices this year, whether to sell at a loss or shut down entirely. However, lenders still maintain hope that these startups can find buyers, even if it means going through a fire sale.

In many forced acquisition scenarios, equity investors often do not recoup their investments. Losses are a known risk in venture capital. When startups do sell, many transactions remain undisclosed due to unfavorable outcomes for investors.

Despite the inherent risks, the allure of venture debt remains strong. In 2024, new venture debt issuance reached a 10-year high of $53.3 billion, according to PitchBook. Notably, a considerable portion of this capital has been funneled into AI companies, including CoreWeave, which secured $7.5 billion in debt financing, and OpenAI, which obtained a $4 billion line of credit.