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This is Bloomberg Business Week with Carol Messer and Tim Steneveek on Bloomberg Radio. Well, we're kind of going all in on private equity today. As I mentioned, we got a great lay of the land earlier from Christina Paget, head of Leveraged Finance Research and Analytics at Moodies. So let's stay with private credit, but go a little more specific. We'll talk venture debt. Typically, venture debt is financing that's offered for startups that have yet to make a profit
the equity of existing investors and startup owners. It's not diluted with venture debts since, unlike venture capital, those who provide venture debt aren't taking a piece of the company. For an update, we got back with us David Sprang. He's the founder, chief executive officer and chief investment officer of Runway Growth Capital. He joins us from Silicon Valley. David, good to see you. How are you.
I'm doing well, Tim, how are you?
We're doing well. Thanks. I do want to say welcome back to Runway Growth. I did see back in July you went on leave, so it is really good to see you back at the Helm. How is everything.
Great? Yeah, life is good. It's a very interesting time in our business. There's a lot of turmoil happening, particularly in the early stages. And you know, we're a year now past the demise of Silicon Valley and that part of the market is still being figured out. It's not where we play. We play in the very very latest stage of the market. So the SVB situation hasn't really impacted us, and the world continues to be really interesting for us, and more and more really good companies are
staying private longer and needing capital. And as you mentioned, debt is a fantastic solution, particularly at the late stage, because you don't have to give up any additional equity.
So what happens in a high rate environment like we've been in for the past eighteen months, what happens to your business and what happens to how much these companies have to pay to access capital.
Well, first of all, I would point out that it's really not a high rate environment. It's higher.
That's a good point than we were depending on where you are sort of in your Silicon Valley life cycle, right.
Yeah, that's true. But we've had many many unbelievably successful, important, impactful companies that have been financed with interest rates of five percent. So it's not high relative to history, but it's high relative to where we were, and there's certainly been a sticker shop and a little time to adjust to it, and a requirement that everybody be perhaps a little bit creative, and we're doing some of that ourselves.
But the interest rates going from essentially zero to five percent or over five percent in less than two years, that is dramatic and impactful and has caused a little bit of a sticker shock. But we're working through that, and more and more companies are realizing that five percent
base rate. Although it may be higher than where we were two years ago, and shoot, we missed zero interest rate, but five percent is still quite low relative to history, and quite low relative to the cost of equity, and quite low relative to the return on investment that will be achieved with the loan capital.
But the interesting thing about loan capital to the venture capital community here companies who have traditionally taken venture debt.
A lot of these companies had little to no profit and in at least equity markets and certainly broader debt markets, there seems to have been a much broader set of discipline here are there a lot of companies that if there are just not making enough money here are being turned away by debt markets because we are in a different environment now than we happen for the last decade.
Yeah, it's a really important point. And at Runway, we're fortunate that from the very beginning when we founded the business in twenty fifteen, we've always focused on half the profitability and have looked for companies that had a near and a clear path to profitability and and therefore not subject to huge amount of downstream financing risk. So that's
always been an important part of our underwriting. But your point is I think very fair and has become a mantra in Silicon Valley and in innovation economy and in the startup world, is you really need to be thinking about your road and your path and your funding path to get to profitability. And many companies that raised capital in twenty and twenty one and then realized, either through the coaching of their investors or however, that it's not going to be so easy next time. Valuation is going
to be lower. We need to make is money last they've done a good job of that, perhaps by cutting burn or finding other paths. But now they're running out of capital and they're coming back, and your point is exactly right, many of them are being rejected.
Right, If many of them are being rejected, I really wonder what the environment looks like moving forward, because you know, you alluded to the fact a little earlier that we were almost one year since the collapse of Silicon Valley Bank. I remember the years leading into this kind of boom period for Silicon Valley Bank. The largest investment banks in the world were nervous about providing debt to venture backed companies,
particularly ones that were not turning large profits. What does the environment look like now, after all the lessons have been learned.
Well, it's important to separate early stage venture lending from late stage venture lending, like we do. And I guess I would add that a big factor here is the regulatory environment. And the runway is a non bank lender or a specialty finance company. So we're not subject to oversight by the fdi C, you know, or o c C or anything like that. We are subject to regulation
by the SEC. And so your point that lenders don't like to lend to pre profit companies is very true, and a lot of it is driven by their regulatory oversight. And so what you find is that the banks that are serving this market and attempting to step in perhaps where Silicon Valley Bank played are are not so interested
in making the loans. They're much more interested in taking the deposits and providing other feed generating services, you know, like credit cards and foreign exchange and that kind of stuff, and don't necessarily want to make the loans. And so that's where somebody like us can step in and create
a very synergistic relationship with a bank. And so like we would explore ways to work with HSBC or JP Morgan or Silicon Valley Bank or Bridge Bank or Square one or any of these banks where they want the deposits but not the loan, and we want the loan but don't take deposits, so we can partner up nicely with them. We don't lend to early stage companies, so that's not a fit for us. There there is going
to be some failures there already have been. There's going to be a lot of private to private mergers as these companies attempt to find a way to survive. So I am. I'm predicting a very challenging year in twenty twenty four for early stage companies that don't have a really clear path of profitability and don't have equity investors that have dry powder and are willing to help them get there.
David, we always appreciate you coming on. It's good to have you back on the program with us. David Sprang as the founder, CEO in CIO at Runway Growth Capital, joining us from Silicon Valley