While much of the economy has been impacted by the COVID-19 outbreak, Runway remains fully committed to its mission of supporting entrepreneurs in building great businesses. Like others in the venture debt and venture capital community, the pandemic has made us reassess our risk tolerance and tighten our lending criteria. A thoughtful and patient approach is needed given the uncertainty surrounding the public health crisis. However, this has not diminished our appetite or capacity to fuel great companies. We have significant dry powder available and are actively seeking lending opportunities across technology, life sciences and consumer industries.
What we’re hearing in the VC community
The pandemic has sparked a lot of speculation about the impact on our industry. We’ve spoken with many players in the ecosystem, and there appears to be general consensus about a few predictions:
- Capital availability will be diminished. There is a lot of dry powder amongst venture funds so deals will still be done, but at a slower pace than we had seen in the years leading up to the pandemic. Venture funds with capital are taking a conservative view on new investments, while funds with limited capital are focusing on the existing portfolio. Many VCs are advising their portfolio companies to push out funding expectations until the economy normalizes or to build a plan around capital available from insiders. In other words, “don’t expect new, outside equity investors any time soon.”
- Cost of capital will increase. Greater uncertainty in the future leads to more conservative valuations. Growth expectations have been reduced as the full economic impact is still unknown, yet VC return expectations remain. Many of the deals that have been done over the past ten weeks have been completed at lower valuations than had been expected.
- Exit opportunities will decrease. Many companies have put a hold on acquisitions and the IPO market has come to a standstill. This is unlikely to change until there is more certainty on the economic outlook, as well as the future impact on acquirers’ businesses.
- Focus on profitability. Many venture-backed companies have historically sustained high burn rates to drive growth. However, in the current environment many VCs are now advising their portfolio companies to focus on profitability. While this strategy may come at the expense of growth rates and valuation increases, it also provides companies with more control given limited funding options.
Consider growth debt as a solution
There is no debate that it’s a much tougher business climate for growth stage businesses now than it was only a few months ago. For some companies, growth debt could be an attractive way to avoid accessing the equity markets while still being able to invest in growing their business. Typically structured as a three to four-year term loan, proceeds are used to fund working capital, growth initiatives and acquisitions. Unlike traditional bank lending, venture debt is available to companies that do not have positive cash flows or significant assets to use as collateral. Most importantly, debt is cheaper than equity and it avoids meaningful equity dilution for entrepreneurs and investors.
Get in touch if you are looking to learn more about growth debt
While a lot has changed around us, we remain steadfastly focused on supporting great companies and entrepreneurs. We are committed to providing flexible debt solutions to borrowers, particularly in this time of uncertainty. We have significant dry powder to partner with the best companies and enable them to capitalize on growth opportunities now and in the future. If you would like to learn more about growth debt, please feel free to get in touch.
Mark Donnelly – Head of Origination
Brian Sapp – Head of West Coast Technology Origination
Rob Lake – Head of Life Sciences