SVB, which federal and California banking regulators seized on March 10, was a major provider of debt financing for venture capital deals. However, at the early stages where Red Cedar Ventures invests, Wesley expects to remain busy in the coming months, as venture capital investments by firms that focus on later-stage rounds ease. “Put that with the other economic factors going on, they tend to freeze people a little bit for some period of time.” When there’s volatility that happens, either with the economy or events like this, they kind of impact who’s funding, how much people are funding and how much gets done,” Wesley said. “Generally, when you’re in our space, we like consistency. “I think (capital) raises will get smaller, I think they will get harder, and with the lack of debt financing, that’s going to squeeze the market,” Grogan said.Īfter the disruption caused by Silicon Valley Bank’s failure, and the collapse days later of Signature Bank, both of which were subsequently sold, “people are still somewhat cautious,” said Jeff Wesley, executive director at Red Cedar Ventures, the early-stage venture investment subsidiary of the Michigan State University Research Foundation in East Lansing. That gap will affect how much companies seeking growth capital can raise from prospective investors. About $3 million to $5 million in venture debt that, for example, may have been part of a $20 million capital round in the past is “just off the table right now,” he said. Venture capital-backed companies seeking larger, later-stage capital rounds of Series B or later will feel the fallout the most, “because there’s nobody to fill that gap right now” for venture debt, Grogan said. The situation creates an “almost perfect storm” for venture capital and a “jitteriness in the market,” said Dale Grogan, managing partner of Grand Rapids-based Michigan Capital Network that manages four venture capital funds and five angel investor groups across the state. SVB’s collapse came on top of higher interest rates, a softening economy and predictions for a moderate to mild recession in the second half, as well as the resulting lower valuations and poor exit environment for investors that have been driving down venture deal flow. The firm invests in early-stage investments in tech companies in the Midwest involved in business enterprise software for advanced manufacturing, agriculture and food, transportation and mobility, and other industries.Ībout half of Grand Ventures’ portfolio companies have some form of venture debt with Silicon Valley Bank, Signature Bank in New York that failed March 12, or through other banks, Streit said. I think there’s going to be a little bit of a reset in terms of short-term liquidity.”īetween two funds, Grand Ventures has $70 million in assets under management and recently completed successful follow-on capital rounds for three portfolio companies, Streit said. Well-performing companies that are growing and addressing big markets will continue to get funded and will continue to be a great source of returns for investors. “Credit’s going to tighten, but our overall view is this isn’t the end of venture or the end of the world. “For portfolio companies, liquidity is going to be a little harder to find,” he said. that firms are seeking to deploy after record-breaking years in 20, Streit said. Tighter credit for venture capital deals following Silicon Valley Bank’s collapse will put liquidity “at an even higher premium,” although there remains “a ton” of dry powder in the venture capital in the U.S. The fundraising environment was already getting harder a year ago when interest rates began to rise and concerns picked up about a potential recession, said Tim Streit, co-founder and managing partner at Grand Rapids-based Grand Ventures. That potentially may make fundraising for growth capital an even more difficult proposition for companies. The Santa Clara, Calif.-based bank’s failure leaves a gaping hole in the ability of companies seeking later-stage investments to secure debt financing that often accompanies venture capital rounds beyond the seed and early stages. Silicon Valley Bank’s epic collapse further tightens the environment for venture capital-backed companies planning to raise additional and larger capital rounds in the near future, local investors say.
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