Tech companies fear banks will tighten their lending and have to diversify their funding sources.
The bankruptcy of a bank always arouses fear, but at the same time Silicon Valley Bank (SVB), whose customers are almost half of US ‘startups’, increases the tension in the industry. Its bankruptcy left a $6.7 billion gap in the debt market., or ‘risk debt’ and cast doubt on the survival of many ‘startups’, especially those in the early stages. In the United States, broadcasting company Roku revealed that 26% of its cash is protected by the SVB, while Roblox, the company specializing in online video games, has deposited $150 million in the bank. But this worrying situation does not stay in the USA, Also expanded to include Spanish ‘startups’“Now that we’re starting to see how banks are starting to support ‘startups’, this may cause many to consider returning,” explains Héctor Mata, founder and CEO of the Shakers initiative. Entrepreneurs choose alternatives to secure their assets, such as diversifying their sources of finance or, in some cases, cutting expenses even on personnel.
“It will be even more difficult to increase financing,” summarizes Diego López, BlueBull fund’s Director of Debt Advisory, as the fall of the SVB coincided with the context of inflation and high interest rates, which had already reduced investment in the capital markets. private and company valuations. According to the Spain Entrepreneurship Map 2022, prepared by South Summit in collaboration with IE University, The turnover of Spanish ‘startups’ will decrease by 25% in 2023and, as a result, the number of completed funding rounds will increase.
The results are already being felt in the industry. “Funds are extending dates to meet more and everyone is very careful when making short-term decisions,” complains Ricardo Tárraga, CEO of the Yudov initiative. The current fiscal year is seen as a ‘stalemate’ year: Companies that can survive through 2024 will have a lot of cattle, the rest will have to close if they are not profitable and need more investment. “It will be a year to tighten your belts and seek profitability,” he adds.
Javier Echanove, co-founder and COO of Be Levels, shares the same view: “There will be more and more business models that put the threshold where they can start to be profitable, or that will not be profitable. There will be more and more challenges.” can reasonably explain. In his case, the breakeven point was reached in his second year of life (2022). But a phase is over not only for companies but also for funds.. Many followed strategies in which they invested in dozens of fast-growing, highly leveraged ‘startups’, with the premise of hitting a case or two to make up for others’ losses.
More banks and debt markets
Companies took action to adapt to the new reality: “They had to diversify the banking pool they were working in,” explains Javier Rivas, a professor at EAE Business School. In the United States, some firms have resorted to traditional financing, and others “have faced a lot of pressure to meet their payment commitments and have had to cut spending in some personal cases.” Due to the international economic situation, The gap between the price of the first 20 ‘startups’ in public offerings in the United States and the current price narrowed by an average of 59%.According to the latest report from CB Insights.
Other measures target the debt market, therefore used by the SVB. “This context will make action by alternative debt providers more necessary to fill this financing gap,” he adds. According to GP Bullhound’s latest report, it’s a huge opportunity for ‘venture debt’ funds and ‘fintech’ to distribute around $30,500 million more debt in 2022 than the previous year.
In some cases, the option is greater geographic and industry diversification of “startups,” says Orfeo Balboa, Program Manager for First Drop funding. He is the only one who is optimistic about the future: “There will be no shortage of opportunities for $300,000 million in venture capital waiting to be invested in ‘Startups’,” he states, with half of the money invested by venture funds around the world in 2022. Adapting to new operations won’t be easy after raising rounds in tough valuations in 2021 and 2022. “Many of these rounds are likely to be covered by existing investors to build a bridge to the company without having to rebuild the valuation,” says Íñigo Laucirica, Investment Manager of the Samaipata fund.
solid companies
If the total investment decreases by 20% compared to the previous year to approximately 3,500 million Euros in 2022, forecasts point to a tough 2023. Despite the limited exposure of Spanish ‘start-ups’ to the United States, the decline of the SVB and subsequent crisis of Credit Suisse and Deutsche Bank is leading to a slowdown in ‘venture capital’ investment in start-ups “waiting to see the effects”. mid-term,” says Ruth Clarke, CodeOp Managing Director. In the short term, “it wouldn’t be strange to see the availability of funding for ‘startups’.”
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Although the trend started in the summer of last year when interest rates started to rise, investors are now prioritizing their analysis of profitability or capital efficiency metrics. “We continue to see strong investor appetite for top projects,” explains Laucirica in the early stages. Financing over 3-5m euros, “market sluggish”.
In any case, this will be a temporary situation. It will only affect “those who have taken too much risk in financing their activities”.He points out Rivas. And they argue that we are in a “very conducive” environment for ‘start-ups’ from Samaipata, although all parameters suggest otherwise”: “Access to quality talent has increased in part because of layoffs from big tech companies. there is less competition in the market and the increase in the cost of capital has shifted the focus back to product and implementation aspects”.