Venture debt is in vogue. A top lender from SVB explains why

It’s no surprise that when times get tough and valuations plunge—while VC firms become more stingy with their coffers, as they have this year—startups seeking a cash influx will look to loans. Recently, some lenders suggest startups are flocking to debt for two big reasons: One is “the equity capital markets have just slowed down, there are fewer deals happening,” Dan Allred, a senior market manager who heads up national fintech and payments strategy teams at Silicon Valley Bank, a big lender in the venture space, tells me. And second, “if you are going to go tap equity capital right now, it’s going to be expensive: It’s either going to be a downround,” or a “valuation multiple that you would not have gotten a few quarters ago” or “something structured with a lot of terms and preferences.”

“None of that’s attractive,” he notes, so debt, which comes with its own structures to consider, but is much less dilutive to valuable startup shares, is looking like a good source of capital, Allred suggests. VC firms are also keen on avoiding locking in a dreaded downround, as they’ll have to mark to market their companies and take a hit on their quarterly LP reports: On both sides of the equation, Allred notes, “no one [wants] to touch that.” 

Venture debt deals have topped 1,900 totaling $22.4 billion through the end of September, per PitchBook data (last year, it hit $32.7 billion for the full year). There’s been an increased appetite recently, Allred has noticed, and the loan sizes can be large: As of this week, he says SVB signed term sheets “for, like, $3 million deals and $100 million deals.” 

Case in point: On Thursday, cybersecurity firm Arctic Wolf announced it secured a whopping $401 million in convertible notes led by existing investor Owl Rock Capital. Arctic Wolf has been planning an IPO in 2022 but has put a debut on the backburner amid the tricky market. CEO Nick Schneider wouldn’t comment on the IPO plans but told me “the primary impetus for the raise was really to ensure flexibility,” both on timing for “what might be next” for the company, and for M&A. 

He said a downround “wasn’t really a concern for us” given the company’s position, but that the debt raise was the best option. As for the IPO, Schneider says, “especially with this round,” timing is “really in our hands.” Arctic Wolf raised $150 million last year at a $4.3 billion valuation, per PitchBook data.

Indeed, SVB’s Allred tells me that many of the companies he’s seeing right now raising debt are established companies that raised money in 2021 or early 2022 that “are pretty well financed” and are trying to “bolster their balance sheets as much as possible, just because of the uncertainty of this macroeconomic environment.” 

Companies that were ready to IPO are now turning to debt owing to the dried-up pipeline, as The Information detailed in a recent piece. “That’s what I’m hearing more than anything,” David Flannery, senior managing director and president of Vista Equity Partners’ credit business, Vista Credit Partners, tells me: that there’s ample uncertainty about when the IPO market will reopen, so companies “want to take cash and fortify their balance sheet.” (Think Arctic Wolf, for example.) In fact, Flannery argues that for companies he’s working with right now, the concern is more capital market uncertainty than economic. (Vista typically works with enterprise software companies on the more mature side, Flannery says.) 

The question I have here is, with the risks of debt, if the economy stumbles into a recession, will these loans prove a prudent move that will spare startups the need for a downround later, or will they present their own issues if companies struggle to repay the debt down the road if the economic downturn outlasts current expectations? 

There, Allred has a bit of a warning: “If this economic cycle persists, and this lasts…into the second half of next year,” Allred notes, “we will get those data points.” 

Tiger’s whimper: Mighty investment firm Tiger Global’s new fund is looking more like a whimper than a roar in size. As Axios first reported, the firm is aiming to raise $6 billion for its new fund focused on private tech investments—a figure less than half that of its previous fund, and lower than the reported $8 billion the firm was potentially targeting previously, per Bloomberg. Though the target is still formidable, the much-reduced size raises questions about the availability of funds and confidence from LPs across the venture market. Tiger is attempting to fundraise as it loses its star software partner, John Curtius, who was originally supposed to leave the firm in June. Fortune‘s Jessica Mathews confirmed with three people familiar with the matter that Curtius is no longer at Tiger Global, as of yesterday. A Tiger Global spokeswoman declined to comment regarding the new fund and didn’t respond to a request for comment on Curtius’ departure.

A little hello: As Jessica mentioned in yesterday’s newsletter, I’m excited that you’ll be seeing me here more often. As such, please send me all your deals, scoops, venture gossip, and hellos—I’d love to hear from you as I get to know the Term Sheet readers better! Send me a line: anne.sraders@fortune.com, or my DMs are open: @AnneSraders.

Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- ​​The Rounds, a Philadelphia-based zero-waste delivery and refill service company for household items, raised $38 million in Series A funding. Redpoint Ventures and Andreesen Horowitz co-led the round and were joined by First Round Capital. 

- Tidal Financial Group, a Chicago, Detroit, Milwaukee, and New York-based ETF investment and technology platform, raised $32 million in funding led by FTV Capital.

- Elpha Secure Technology, a New York-based cyber insurance startup, raised $20 million in Series A funding. Canapi Ventures led the round and was joined by investors including Stone Point Ventures, AXIS Capital, State Farm Ventures, The Hartford STAG Ventures, Fermat Capital Management, and EOS Venture Partners.

- Revelio Labs, a New York-based workforce intelligence company, raised $15 million in Series A funding. Elephant Partners led the round and was joined by investors including Alumni Ventures, BDMI, K20 Ventures, Techstars, and Barclays.

- Xembly, a Seattle-based automated chief of staff for employees, raised $15 million in Series A funding. Norwest Venture Partners led the round and was joined by investors including Lightspeed Venture Partners, Ascend, Seven Peaks Ventures, and Flex Capital. 

- Gather AI, a Pittsburgh-based supply chain robotics company, raised $10 million in Series A funding. Tribeca Venture Partners led the round and was joined by investors including Xplorer Capital, Dundee Venture Capital, Expa, Bling Capital, XRC Labs, and 99 tartans. 

- Lightdash, a remote-based open-source business intelligence platform, raised $8.4 million in seed funding. Accel led the round and was joined by investors including Moonfire, Y Combinator, and other angels.

- Tumble, a San Francisco-based smart laundry startup, raised $7 million in seed funding. Hivers and Strivers led the round and was joined by investors including Array Ventures, WTI, PenFed Foundation, and Zag Capital.

- Fintor, a Palo Alto, Calif.-based real estate investing platform, raised an additional $6.2 million in funding. Public.com, Hustle Fund, 500 Global, VU Ventures, Graphene Ventures, and other angels invested in the round. 

- Lawhive, a London-based legal tech platform, raised $2 million in seed funding. Episode 1 Ventures led the round and was joined by investors including Tiny VC and other angels.

PRIVATE EQUITY

- Cadrex Manufacturing Solutions, a portfolio company of CORE Industrial Partners, acquired E.P.M.P., a Seguin, Texas-based sheet metal fabrication services provider. Financial terms were not disclosed. 

- CenterOak Partners completed a majority recapitalization of Palmetto Exterminators, a Charleston, S.C.-based pest control company. Financial terms were not disclosed. 

- Greenbelt Capital Partners completed a majority recapitalization of Unirac, an Albuquerque, N.M.-based solar photovoltaic mounting solutions designer and manufacturer for the residential, commercial, and industrial markets. Financial terms were not disclosed. 

EXITS

- Diversis Capital agreed to acquire the remaining minority stake in Tempo Software, a Boston-based roadmapping, time, capacity planning, and portfolio management platform, from Origo. Financial terms were not disclosed.- KKR agreed to acquire a majority stake in Boasso Global, a Tampa, Fla.-based depot, maintenance, cleaning, and transportation services provider for the ISO tank container industry, from funds advised by Apax Partners. Financial terms were not disclosed.

OTHER

- OneDigital acquired HealthWorks, a Chicago-based insurance advisor. Financial terms were not disclosed.

FUNDS + FUNDS OF FUNDS

- CRV, a San Francisco-based venture capital firm, raised $1.5 billion across two funds focused on early stage companies and follow-on Series B and C investments. 

- Matrix, a Boston and San Francisco-based venture capital fund, raised $800 million for a fund focused on pre-seed, seed, and Series A companies across industries.

PEOPLE

- ​​AE Industrial Partners, a Boca Raton, Fla.-based private equity firm, hired Chris Emerson as an operating partner. Formerly, he was with Airbus U.S. Space & Defense.

- New Enterprise Associates, a Menlo Park, Calif.-based venture capital firm, hired Philip Chopin as partner. Formerly, he was with 83North. 

- Octopus Ventures, a London-based venture capital firm, hired Richard Anson as venture partner, Mat Munro and Owen Matters as investment managers, and Maiuran Chandrakumaran and Flavia Levi as investment associates. Formerly, Anson was with Conception X, Munro was with Conversocial, Matters was with Williams Advanced Engineering and Licensing, Chandrakumaran was with East African Holding, and Levi was with Plug and Play.

- Silversmith Capital Partners, a Boston-based growth equity firm, hired Bryan Landerman as operating partner, chief technology officer. Formerly, he was with AWS.

- Threshold Ventures, a Menlo Park, Calif.-based venture capital firm, hired Arpit Mittal as principal. Formerly, he was with Gradient Ventures.