| | | | | | | Presented By Fidelity | | | | Axios Pro Rata | | By Kia Kokalitcheva · Jul 16, 2022 | | Happy Saturday morning, readers! Or really early Saturday, if you're on the West Coast like me.🙂 Today we're taking a look at how the venture capital funding crunch is affecting startups at various levels of the food chain. - 🚨 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
Today's newsletter is 856 words — a 3-minute read. | | | | | | 1 big thing: The scramble for startup cash |  | | | Illustration: Aïda Amer/Axios | | | | "Never waste a good crisis," goes the saying, but some investors are doing just that when it comes to the funding crunch in private tech companies. Driving the news: Coatue Management, Viking Global Investors and others have pulled together structure equity funds to provide cash to later-stage companies seeking to maintain their valuations. The big picture: Since the public market downturn began late last year, venture capitalists have been pinching pennies. It hit pre-IPO companies most immediately, but is now steadily spreading down the stack. - While VCs have loads of unused cash (2021 was a record fundraising year), they're being more judicious in how they invest — in part because everyone's still trying to get a handle on the market.
Between the lines: There's been an uptick in interest in structured equity, venture debt and other alternatives to traditional venture capital, all in the name of avoiding down rounds. - "Both are commonly used at this point in the cycle even though VCs have a lot of dry powder and are keeping it for their best companies," says Runway Growth Capital founder and CEO David Spreng, whose firm specializes in venture debt for later-stage tech startups.
- "[Structured equity] is really just another way of saying, 'Fine, company, you can name the price and you can stay a unicorn if you want to, but I name the terms,'" he tells Axios.
Zooming in: So far, venture debt terms haven't dramatically changed from the boom times, experts tell Axios. - However, Spreng predicts they'll get a little less borrower-friendly by the end of the year.
- "The risk is going up in a number of ways," say Brex Asset Management CEO Benjamin Wu.
- "No. 1, it's harder to raise capital, and No. 2, companies are also seeing that their customers are more cash-conscious, so growth might not be the same."
The bottom line: Startup financing may look quite different by the end of the year. |     | | | | | | 2. What they're saying: Haggling for the best price |  | | | Illustration: Shoshana Gordon/Axios | | | | In February, conversation automation startup PeopleReign decided to spring for venture debt. It started two months after closing a fresh round of venture capital, amid growing signs that the market downturn had legs. What they're saying: "We had just closed an equity round, so that's the time to do it," CEO Dan Turchin tells Axios. - "We have funding for 18 months, and this gives us six more months to extend [annual recurring revenue]," he says of the startup's math.
Of note: PeopleReign's bank at that time offered venture debt financing and gave the company a term sheet. Yet Turchin — who's raised venture debt for prior companies he's run — wasn't impressed by the terms. - With venture debt becoming a more widely available funding product, the startup was able to shop around and get two more term sheets, but with much more attractive terms, he says.
The big picture: "I would love to say that discipline never goes out of style, but it would be dangerously misleading," Turchin says of the pandemic's boom times. - "We went through a period where valuations were astronomically high, and we got credit for every incremental dollar of revenue."
- But now, the tide has turned, and many companies are finding they may not meet investors' higher bar.
The bottom line: More startups are getting comfortable with alternative financing, now that free venture cash is much less plentiful. | | | | | | | | 3. SBF to the rescue |  | | | Photo illustration: Gabriella Turrisi/Axios. Photo: Tom Williams/CQ-Roll Call, Inc via Getty Images | | | | Speaking of getting financially creative... the Economist (and Axios' Felix Salmon) recently compared FTX co-founder and CEO Sam Bankman-Fried to JP Morgan. After the panic of 1907, the famous banker worked with other financiers to keep the banking system afloat through cash infusions. Yes, but: Warren Buffett's actions after the 2008 crisis also offer an apt comparison. - Between 2008 and 2011, Buffett invested in a number of blue chip companies like Mars, Goldman Sachs, Bank of America and Dow Chemical.
- By the fall of 2013, those investments had yielded profits of "$10 billion and counting," per the Wall Street Journal.
- He followed his own advice: "Be fearful when others are greedy, and be greedy when others are fearful."
Between the lines: Buffett wasn't just throwing lifelines indiscriminately — he targeted companies he believed were fundamentally valuable and thus, were good bets. Bankman-Fried is taking a similar approach. FTX struck a deal with crypto financial services company BlockFi, largely to protect its customers and contain the fallout from spreading further into the market. - But FTX reportedly walked away from a potential deal with Celsius because of a weak balance sheet and other red flags.
What we're watching: Whether FTX Bankman-Fried's bets right now pay off as handsomely as Buffett's did. | | | | | | | | A message from Fidelity | | You prep for your IPO — Fidelity has your back at every step | | |  | | | | Fidelity Stock Plan Services can provide equity compensation and management solutions that keep your momentum going — to and through life as a public company. Why it's important: Together, you can create equity comp solutions that work throughout your company's journey. | | | | | | 📚 Due Diligence | - Venture debt growth reaching all areas of VC market (Pitchbook)
- Start-Up Funding Falls the Most It Has Since 2019 (NYTimes)
- King Street: Venture Debt Offers a Way Around Slowing Valuations (Institutional Investor)
- Alternative To Venture — Capchase Raises $400M In Debt (Crunchbase News)
| | | | | | | | 🧩 In lieu of trivia... | | A question: If you're an entrepreneur, CEO or investor who has experiences with alternative startup financing, tell me about it — when, why, how it played out! | | | | | | | | 🧮 Final Numbers |  Data: PitchBook; Chart: Erin Davis/Axios Visuals | | | | | | | | A message from Fidelity | | You lead the way through IPO — Fidelity backs you all the way | | | | | | | | Fidelity Stock Plan Services can provide equity compensation and management solutions that support you through your company's journey. Why it's important: Together, you can create equity comp solutions that keep up your momentum — to and through life as a public company. | | | | 🙏 Thanks for reading! See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and venture lenders to sign up. |  | | Why stop here? Let's go Pro. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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