Credit. There is a common point in 10 out of 10 conversations with founders and venture capital funds throughout this week, the first after the crash of the Silicon Valley Bank. From the side of those in the land of Uncle Sam (or in other countries outside Latin America), the scenario is of concern. The absence of the lines offered by the Silicon Valley bank, created especially to serve this group of companies — even when they still did not have positive cash flow — is felt as a blow, a difficult problem to be solved, at least by while. On this side, the situation could not be more different. The absence of the SVB remains a milestone, but it is far from representing a structural change in the way startups access money.
The EXAME IN interviews throughout the week showed that, forFor those who have always lived with high interest rates, threats of rising inflation, a devalued currency in relation to the dollar and with country risk, thinking about taking out some kind of credit with an American institution — even if it were the SVB — in the phase companies (early or mid stage) has always been synonymous with accumulating too much risk.
Factors that add to the functioning of the banking system, especially the traditional one, and the information requirements that companies at the beginning of their lives are unable to offer. It is a scenario that is at the beginning of its trajectory of change, it is true. Last year, Reuters pointed out that Itaú BBA reached a loan portfolio of BRL 7 billion with startups. And, in the previous year, BTG Pactual (from the same group that controls Exame) created boostLAB, a line of credit especially aimed at technology companies, with an eye on companies that have already gone through venture capital funds and that generate monthly recurring revenue. .
“We are used to more leonine loan conditions. Today we have more lines of credit than in all of history, but even so, real guarantees are often needed. , for example”, says Pedro Carneiro, partner and director of investments at ACE, to EXAME IN.
While this is a scenario that is starting to change, ‘remains’ for startups, so far, to build an ecosystem in which the main mode of growth consists of ‘passing the hat’ to investors in exchange for shares in the company. It is a task that has become more difficult over the past two years for companies of all types and sizes, with the increase in interest rates, but which, at the same time, has brought some relief to early-stage companies with an appetite for funds for smaller checks.
Data compiled by the District show that investment in Venture Capital in Brazil in 2022 totaled BRL 4.4 billion. It is less than half of the amount invested in 2021, of BRL 9.8 billion, but it shows an important advance compared to the pre-pandemic period, when the figure was BRL 3.6 billion. The appetite for companies in the initial stage is clear: last year, 755 deals were closed, while in the previous year, with a figure more than twice as high, the amount was allocated to a volume of business only 15% higher.
For those who (today) suffer from a lack of appetite for funds (Series A, Series B and so on) the less negative side is the possibility of accessing the financial market. An extreme example: Nubank finalized, in January of this year, a financing of US$ 150 million with the International Finance Corporation, a World Bank unit focused on the private sector. A less extreme: in January of this year, fintech iCred raised BRL 300 million via FIDC, shortly after raising BRL 100 million using the same instrument.
Venture debt
Meanwhile, in the United States, the whole thing works quite differently. One of the highlights of Silicon Valley Bank, looking at companies at the beginning of their trajectory, was the Venture Debt . A short-term loan modality carried out mainly by companies in the early stage, which works mainly as a “bridge” between two rounds of funding, to meet cash flow needs.
“Why was SVB important? Because it offered products that the big banks did not offer. Big banks only offer these lines of credit to startups and founders in very large cases. While there, it is very common for founders to borrow money to support themselves”, says Pietro Bonfiglioli, co-founder of Fisher Venture Builder, to EXAME IN.
With a strong venture capital fund behind the operation or with recent funding, companies turned to the SVB in search of liquidity, usually with payment terms of 12 to 18 months. Like every credit operation, this one also requires payment within established deadlines and interest, but it works for companies that need money to keep operations standing.
To encourage access to it, SVB had contacts on both ends: with startups that needed the money and also with venture capital funds, which fed an ecosystem of VCs with Silicon Valley bank accounts to be able to provide access. to better credit terms for invested startups. Not to mention the fact that many funds, as Fortune showed last week, used the bank as a custodian for funding operations.
“At this point in the economic cycle, with valuations under pressure, venture debt has become extremely attractive to founders looking to build cash ahead of funding rounds. I avoid saying it’s an ‘easy’ process, because raising capital is harder than ever. But it works as a tool to not put pressure on valuations, avoiding a down round”, says Francesca Whalen, managing partner of Rocca Ventures, to EXAME IN.
To give an idea of the size of this market, with SVB, data from Pitchbook show that, in 2021, Venture Debt moved US$ 31 billion, a figure that was less than half (US$ 14.7 billion) in 2017. Meanwhile, in Latin America, in the same year, this was a US$700 million market, according to data from the Association for Private Capital Investment in Latin America (LAVCA). Which makes clear the difference in access to this type of financing, and the interest in promoting it, given the very different macroeconomic conditions between both countries.
Even so, initiatives are beginning to emerge here as well. O Brasil Venture Debtthe first fund dedicated to the sector in the country, and the A55, fintech aimed at offering a line of credit for early stage startups, are some of the recent highlights. In the view of Felipe Andrade, co-founder of Domo Invest, the initiatives represent a growing market, even if this does not happen exponentially.
“This modality will grow in the country, but not now and not overnight. The receivables market, on the debt side, is much more developed here than in the United States, for example. Here, there is the opportunity to explore paths such as credit card receivables, bills and even receivables to perform. Medium-sized companies and startups are often not used to dealing with this world, but they will have to understand credit more and more”, affirms Andrade.
Where the two worlds meet
This is what becomes clear from the break in the SVB and, mainly, from the increase in interest rates. In the United States, a country of traditional zero-per-year fees, startups mainly left the money in the SVB checking account. “I remember when, about five years ago, I was offered an investment product for the money in the account to yield 0.3% a year and I found it interesting”, says Benjamin Gleason, co-founder of Guiabolso and founder of Kamino, to EXAM IN.
On this side, the ‘hedge’ in the case of the bankruptcy of the Silicon Valley bank was not necessarily an increase in awareness about investments, but a natural factor of the operation: in order to pay expenses in reais, companies here had to have an account in the United States (to fundraising), but they had to open an account at a national bank to be able to transfer the money and pay the necessary expenses.
This, incidentally, is another point of difference between here and there. While in the United States the lack of credit is seen as a huge problem, making those who live there and have contacts with other banks able to mediate the relationship between entrepreneurs and these institutions — as happened with Cauê Mançanares, CEO of Investo — here, one of the main concerns is the absence of someone to bridge the bureaucratic structures for opening companies in the land of Uncle Sam. There are already other alternatives to try to occupy this place, such as Kamino, Latitud’s current account, which complete the offer of other more traditional institutions, such as Avenue.
Bringing more “awareness” about the role of this financial management is a relevant point, but not so simple to resolve. For Piero Minardi, president of ABVCap, more than a good financier, it is necessary to involve more areas to achieve a real improvement in this sense. “I don’t think it’s just a CFO, for example. It has investment committees, investors who must look at the policy and cash management of the companies in which they invest. It is an issue that involves many more people,” he says.
Attention to where the money is, after the SVB episode, should trigger new rounds of funding from now on, in any case, as other sources in the Venture Capital market heard by EXAME IN point out. Along with it, another relevant concern also occupies the minds of executives: the stain for the sector left with the end of the SVB, even though this is a banking crisis and not one of the sector. It is still too early to pinpoint the future effects of this whole story, but the expectation, at least in the short term, is that the US government announcements will manage to calm spirits from now on and that the situation will gain more amenable contours over the course of the years. next days.
For those on this side, it remains to wait for the resources of the FDIC (the North American FGC) to fall into the accounts to continue the business. While that does not happen, debt alternatives, especially for those who are already more structured in the United States, are beginning to be studied, as shown in recent news. What drives, for now, the debt market there, with neobanks like Brex and venture debt institutions like TraceFinance. But it still hits this side with much less force than the United States. It is the blessing and the curse of living in an environment where access to credit is (still) restricted for someone just starting to grow.
