Yet venture debt—any debt financing provided to venture-backed companies by a bank or private lender—has been an indispensable kind of shadow funding for many founders who use it to supplement raising capital from VCs without further diluting their equity stake in the company. When financing rounds were frequent and lucrative in 2021, taking on some debt to accelerate growth didn’t seem like a huge risk to startups or lenders when equity was easy to come by. And the king of venture debt was, of course, Silicon Valley Bank which had $6.7 billion outstanding in venture loans last year, according to Pitchbook-NVCA Venture Monitor. Fast forward to today and, “the state of venture debt is declining,” explained Peter Cohan, a business professor at Babson College.  

While First Citizens has acquired SVB's debt portfolio, experts have doubts about whether the regional bank can fill the shoes of the prolific Silicon Valley venture lender. “It is unlikely that First Citizens will have the skill to make new venture loans,” said Cohan.

So who has been rushing to fill the lending hole left by SVB for startups in need of extending their runway? Private, non-bank lenders, who notably charge higher interest rates. “SVB failing was the best thing that could have ever happened for non-bank venture debt lenders,” said Zack Ellison, the managing partner at A.R.I. Venture Debt Opportunities Fund. Unlike banks, which provide a range of services of which loans are just one, the business model of these private lenders is to make money from interest on debt. 

“Don't expect the bank-led venture debt to be returning in full force anytime soon,” said Jay Jung, a fractional CFO and advisor with Embarc Advisors who helps startups structure their venture debt financing. “For our clients, we've been talking actively with the direct lenders like Western Technology Investment and Trinity Capital because they're a little bit more flexible,” he explained. While typically a bank like SVB would only extend venture debt along with a funding round, private lenders tend to give startups more leeway, according to Jung. “If a company raised a year ago and they haven't raised an equity round recently, but if they still have a decent runway and the metrics are right, the [private lenders] still make a new loan,” said Jung. 

These non-bank loans are costly for startups compared to the deal they got with SVB. Last year, SVB was generally offering venture loans at the prime interest rate, which was about 3.25%, plus up to 2% interest. Non-bank loans are offered at the same prime rate plus generally 6% to 8% interest, according to Ellison. Yet today, the prime rate is 8%, making the base rate far higher for borrowers. With competition for fewer lenders, borrowing is likely to get even more expensive in the future. “Once the existing pipeline is worked through I expect we will see pricing increase but it will mainly be from the non-interest components,” said Ellison. These other components include an underwriting fee, backend fee, and warrant package, according to Ellison.

But even if a startup can secure new debt financing, there are downsides. “Venture debt is inherently risky for the simple reason that most startups do not have collateral that the lender can sell to repay the loan if the borrower can't pay,” Cohan explained. “When the IPO market shuts down, venture lenders find it harder to collect on their loans.”

If there’s anything that we’ve learned this year, it's that circumstances can take a nosedive, fast. “It’s like fire, in that it can be very useful,” Jung said of taking on venture debt. “But if you don't use it correctly, you'll get burned.” 

See you tomorrow,

Lucy Brewster
Twitter: @lucyrbrewster
Email: Lucille.brewster@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- Citron, a Suresnes, France-based building energy transition company, raised €16 million ($17.58 million) in funding. Eiffel Investment Group, Entrepreneur Invest, and Bpifrance invested in the round. 

- Capitola, a Mountain View, Calif.-based digital marketplace for commercial insurance, raised $15.6 million in Series A funding led by Munich Re Ventures. 

- Scan.com, an Atlanta- and London-based diagnostic imaging platform, raised $12 million in Series A funding. Aviva Ventures, YZR Capital, Oxford Capital, Triple Point Ventures, and Simplyhealth Ventures co-led the round and were joined by Forefront Venture Partners.

PRIVATE EQUITY

- Vytalize Health, an Enhanced Healthcare Partners portfolio company, acquired a majority stake in Independent Physician Association of New York, a Commack, N.Y.-based company allowing health care providers to remain independent. Financial terms were not disclosed. 

OTHER

- Merck & Co. agreed to acquire Prometheus Biosciences, a San Diego-based biotech company, for about $10.8 billion. 

- WHP Global and EXPR agreed to acquire Bonobos, a New York-based menswear brand, from Walmart for $75 million.

IPOS

- ACELYRIN, an Agoura Hills, Calif.-based late-stage biotech developing inflammatory diseases therapies, filed for an initial public offering. 

- Chia Network, a San Francisco-based blockchain infrastructure company, confidentially filed for an initial public offering.

PEOPLE

- Founders Fund, a San Francisco-based venture capital firm, hired Joey Krug, according to Bloomberg. Formerly, he was with Pantera Capital.  

- Patient Square Capital, a Menlo Park, Calif.-based investment firm, promoted Justin Sabet-Peyman to partner.