Commentary – Full Year 2023
The venture debt markets got off to a historically tepid start in 2023 and continued its slow pace through Q2. According to Pitchbook, despite this slow start, the market rebounded significantly in the second half of 2023. Ultimately, total funding ended up at a four-year low while total deal count skidded to a five-year low. As we review debt as a percentage of the venture equity markets in 2023, the 2023 debt total of $30.2B rose to more than 17% of total equity financings which is in line with the trailing 5-year historical average of 16.86%. The debt markets were severely impacted in the first half of 2023 by the venture banking crisis. While the numbers in the second half demonstrate a rebound in the market, a deeper dive illustrates the continued impact felt by earlier stage companies. Lending to later stage companies drove the second half rebound while average early-stage deal size declined. Anecdotally, conservatism among earlier stage lenders reigned in 2023 as venture bank consolidation slowed the normal course of business and equity markets pulled back.
Sector Activity – Tech Rebounds While Healthcare Slows
In 2023, healthcare debt financing (in total deal value) retreated to lows not seen since 2016. As is often the case with earlier stage debt financing, the debt market tends to follow the equity markets. This reality is even more stark for healthcare companies that face long term R&D requirements and regulatory hurdles before generating revenue. In some cases, healthcare venture lenders will require some equity to be raised for companies to qualify for debt financing. In 2023, with equity more difficult to raise, lenders had to pass on deals where equity would likely have been available in prior years. According to Pitchbook, deal value and deal count in life sciences specifically dropped to pre-pandemic levels which played a role in reduced output in the debt market.
We expect this trend to continue until venture and IPO markets recover. As we look ahead to 2024, sentiment is growing that the IPO market will recover in healthcare, which may prompt additional venture equity activity, and thus spur the debt markets to respond in kind.
In the tech sector, venture debt deal volume declined for the second year in a row. The number of deals completed in 2023 was down 33% relative to 2022. The dollar value for tech sector venture debt deals completed in 2023 was down as well, 27% year-over-year.
Interestingly, deal size increased on average from $20.2M in 2022 to $22.1M in 2023. This ~10% increase in average deal size is all the more surprising against a backdrop where venture equity investors are deploying less capital and valuations are facing headwinds.
In light of the challenges that tech companies had in raising both venture equity and venture debt, many have started to turn towards other forms of capital. For example, asset-based lenders who made loans against accounts receivable, inventory, equipment, and other assets reported a sharp uptick in demand.