Startups burning through their cash are feeling the squeeze as they contemplate their options for raising additional capital.
“With every passing quarter, you see companies that are getting a bit closer to a point at which they’re going to need to do something from a funding perspective,” SVB Financial Group Chief Financial Officer Dan Beck told those attending the Bank of America Securities Financial Services Conference this week.
Many companies are turning to layoffs and other cost-cutting measures to extend the runway before they run out of money. Beck expects that to continue.
“You do continue to see, quarter to quarter to quarter, clients burning down that level of cash and at some point, they’re going to have to take some action, be it an inside round (more money from existing investors) or potentially that down round” at a lower valuation, Beck said.
Former Cisco CEO John Chambers also provided a grim prognosis this week, saying that more than one-third of startups will die over the next two years.
“The market got way overheated,” Chambers said at the TechSurge Summit at Mountain View’s Computer History Museum Feb. 13. “We tend to forget about every 10 to 20 years our lessons learned that would repeat from the dot-com bust.”
One option more startups are turning to is debt financing, such as San Francisco-based Madison Reed recently borrowing $50 million from Runway Capital Growth.
Startups preferred raising equity capital in recent years when financing terms leaned heavily in favor of entrepreneurs, but no more.
“We’re getting a host of calls effectively saying, ‘Hey, remember when we talked about the potential of having a debt solution on top of an equity round?’” Beck said. "That’s where we actually create these relationships that I think we’re going to be talking about over the next five to 10 years.”
One concern among investors is that Silicon Valley Bank may suffer from an adverse-selection process as those facing the hardest time raising capital turn to the bank for venture debt.
“That’s where it gets back to that relationship that you have with the venture capital firms that now spans 20 to 30 years,” Beck said, adding the bank is having more conversations on how companies are faring. “We have the best opportunity to be able to lean in with some of the better companies through the slowdown that we’re seeing.”
