In March of this year, the U.S. saw the second-largest bank failure in its history. Silicon Valley Bank specialized in venture capital-backed startups, primarily in tech. Understandably, the collapse of a venture bank where companies could lose billions of dollars was staggering.
On a recent episode of the Uncharted podcast with SaaStr’s Poya Osgouei, the SVP of Venture Debt and Startup Banking at Pacific Western Bank, Mark diTargiani, shared what the state of venture debt looks like post-SVB collapse and three tips for communicating effectively during chaos.
Wait And See
DiTargiani has worked in sales and business development roles in Silicon Valley for a long time. Over the years, he shifted into consulting with early-stage founders on go-to-market strategies and sales. His vast network of great people led him to PacWest.
When SVB collapsed, people panicked. They looked to other banks with fear, and a healthy dose of caution around treasury management, what people were doing with funds, and what they’d be doing with debt.
Now, it’s a game of wait and see.
Did PacWest feel the impact?
Their boards talked about diversification strategy, and a lot of deposits went to bigger banks, but they remained in a strong position. Many banks, especially those with venture deposits, now say, “What’s next?”
The old world is gone, so what will the new world look like? PacWest and others like it are building that new world.
Who’s Getting Venture Debt And Who’s Not
For PacWest, the lens hasn’t changed for qualifying those who get or don’t get venture debt.
“Fresh equity from great sponsors is the key,” says diTargiani.
Other qualifiers diTargiani looks for in a startup are:
- Revenue, although pre-revenue deals are also accepted.
- Adequate runway.
- Good management teams, and not necessarily having experience but understanding the problem they’re solving deeply and intimately.
Debt is still available, typically around 20-30% of equity raised. Banks like PacWest are still underwriting deals, bringing them to crediting committees, and delivering term sheets.
All it really boils down to is:
- Who is the team?
- How much equity is there?
- Who are the sponsors?
- What are they going to use debt for?
Who Is Venture Debt For
Venture debt is often looked at as an insurance policy, a way of having some extra ability to invest in acquisition or runway or getting a particularly important hire or whatever the case is.
Hardware companies use venture debt for inventory to avoid tapping into equity.
Others use it to extend runway, especially in uncertain equity markets where 8-9-10 more months of runway allows a business to reach some milestones that’ll lead to better valuations.
Philosophically, venture debt is about having a little more gunpowder on your team.
Accessing capital quickly without eating into your cap table is huge.
Who is venture debt appropriate for?
Well, some investors are anti-debt, and they don’t want portfolio companies to take debt.
Others are the exact opposite and want everyone to get debt. Often, the board influences a debt decision, which will determine if debt is right for your company.
Venture Debt Vs. Traditional Lending
Venture debt differs from what most people are used to in a lending relationship, where there’s a lender and a borrower, a one-to-one relationship.
In venture debt, a third person is thrown into the mix, and it becomes the VC as well.
Venture debt is working with companies and investors. So they have to keep operators in mind while also considering what investors are thinking and looking for.
As many people are eager to access more capital, there’s good news.
You likely don’t have to do any extra work because you’ve already done it.
You’ve raised equity and created pitch decks, financials, plans, and forecasts. And those are the things you’ll need for the debt side of things.
3 Tips To Communicate Effectively During Crisis
When you’re in the throes of a chaotic moment, there’s often only one thing you can control: communication.
In hindsight of the SVB collapse, PacWest communicated far better than other banks going through the same experience.
Here are the top 3 things PacWest did well that others can incorporate when communicating in a crisis.
- Take a breath. Don’t respond immediately.
In situations like banks collapsing, people will ask a lot of questions. They want clarity on what’s happening. They’re panicking.
Instead of the usual response of a sales-focused person (respond as quickly as possible), PacWest took a breath and took their time responding to people.
Sometimes quality over quickly is the better decision, especially in these types of situations where you need to figure out what you want to say before you say something you can’t take back.
- Be transparent and communicate the basics.
When PacWest was painted with the same brush as failing banks because of its affinity in the marketplace, we had to show people how we were different.
How did we do that?
By sharing banking fundamentals, like what percentage of deposits were in our venture bank vs. community banking and how much of those deposits were insured vs. not.
PacWest showed its strength through clear communication and sharing of basic metrics.
- Simply asking, “How can we help?”
Up to this point, we’ve communicated that we’re here, have taken our time, and know what we want to say. And then we shared the basics to reassure customers before finally saying, “We’re here to help.”
PacWest was impactful because of our willingness to have conversations with people. To address what they were seeing, what we were seeing, and showing them we cared.
Dealing with a crisis isn’t exactly a frolic through the flowers, but this, too, shall pass. Nothing is permanent, and you can only control what you can control. Things are constantly shifting and changing, so remember these key takeaways.
- Take care of yourself before you take care of others. That means to pause, take a breath, and figure out what’s happening before you start communicating with customers about it.
- Be transparent. Share basic metrics to assure your customer base that everything is ok.
- Be available. Have conversations. Show willingness to listen, answer questions, and follow up with people.
Published on April 11, 2023