Mercury’s venture debt product joins crowded market

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Hello and welcome to Pipeline! This week: Mercury goes into debt, the SaaS slowdown in sight and SoftBank offloads its Cruise stake.

Debt vs Equity

Macroeconomic uncertainty related to the war in Ukraine, rising inflation and public market volatility have caused some late-stage investors to re-evaluate their strategies and trades. But their jitters didn’t slow the VC market. On the contrary, dithering over valuations has made venture capital-backed corporate loans more attractive as a short-term financing strategy – a bridge to an era when conventional equity is easier to obtain on terms. attractive.

The growing venture debt sector has attracted a new player. Mercury, a startup that provides banking services to startups, has just launched an offer.

  • Mercury aims to lend more than $200 million this year and up to $1 billion over the next two years. The loans are offered through its banking partner, Evolve Bank & Trust. For Mercury, the product offers a new line of business; previously it relied primarily on interchange and float on deposits for revenue.
  • Rates can be as low as 4-5% now, Mercury CEO Immad Akhund said. (Rates will rise in line with the WSJ prime rate as the Fed raises rates.)
  • Mercury’s offering is designed to be friendlier to startups that don’t want to deal with the clumsy spreadsheet documentation that some banks require, Akhund said. Mercury’s service connects to a startup’s QuickBooks or NetSuite account to ingest data.
  • Mercury has hired Jason Garcia, the startup’s former chief financial officer and Silicon Valley Bank executive, as its head of capital and relationship management.

Capital is competing to lend to hot startups. As valuations have exploded, startups have been in leverage.

  • SVB is a major competitor for Mercury, as are banks like Comerica or Bridge. Then there are specialty companies like WTI, Hercules and TriplePoint. And other startups like Brex have also entered the market.
  • According to Pitchbook, the number of startups taking on venture capital debt has more than tripled in the past 10 years.
  • Even though the macro environment has changed, interest in risky debt remains strong for different reasons, Akhund said. “You don’t know what the environment will look like 12 months from now and having 20% ​​or 50% extra cushion” gives more options, Akhund said.
  • “Given the ‘risky’ investment environment we currently find ourselves in, founders may find it more difficult to raise significant equity compared to a few years ago,” said Benjamin Wu, CEO of Brex Asset Management, which launched the debt at risk. last August. “Having access to venture capital debt allows companies to continue to expand their footprint, accelerate growth and stay ahead of the competition without relying on traditional funding sources.”

With so much capital, each niche apparently has its own lending option. With capital looking for growth investments, venture capital debt isn’t the only seed debt option.

  • ClearBank and Wayflyer offer funding for startup marketing costs, with upfront cash that is repaid through e-commerce sales. Pipe and Capchase offer similar services to SaaS businesses with predictable recurring revenue.
  • Mercury offers a guide that includes Capchase and Wayflyer to help founders find the funding that’s right for them, Akhund says. “I want entrepreneurs to get the best for themselves,” he said.
  • A new area for fintech startups is warehouse lending for early-stage startups. This form of financing, which provides liquidity for loans, is common for large lenders in the mortgage industry, but is now being offered to young startups for commercial purposes, said Ben Narasin, founder of Tenacity Venture Capital.

Of course, debt carries its own risks. Venture capital debt is best used for things like equipment, data centers, or lease, not for operating costs.

  • That said, if a founder is very confident that another term sheet is coming soon, venture capital debt can make sense, according to Narasin, who previously ran equity investments at venture capital debt store TriplePoint. Capital.
  • Venture capital debt, like other debt products, is usually first in line before shareholders in the event of liquidation. “Debt is not equity,” Narasin said. “Not all entrepreneurs think about that. A knife is a tool but a weapon in another person’s hand.
  • And bridging loans to access a new round are more dangerous, Narasin said. “It’s fine to bridge as long as there’s a destination, not a bridge to nowhere,” he said.

In this risky environment, Venture capital debt can be another useful tool in a founder’s toolbox. But founders should be aware of the risks. Handle sharp objects with care.

Understood

VCs and journalists are (again) fighting on Twitter over anti-tech tech stories, and it’s… insider? Part-Time Media Critic Marc Andreessen took a break from posting Jack Dorsey memes on to complain about a Business Insider article about Glossier’s problems that he considered a “success”. Full disclosure: Axel Springer owns publisher BI Insider Inc. and Protocol. Fuller disclosure: Andreessen was an early investor in Insider.

I took a whirlwind tour of SXSW last week with protocol colleagues. The event didn’t seem as big for VCs (or in general) as in previous years due to COVID, but there was decent turnout from startups and VCs — and especially crypto. First time participant Deena Shakir of Lux Capital writes: “While I hadn’t really considered SXSW as the main must-attend event for VCs until now (compared to, say, Upfront Summit), I certainly encountered more VCs than expected, as well as a large number of founders!”

A MESSAGE FROM PLURALSIGHT

Today’s employment landscape is challenging for organizations looking to recruit and retain top technology talent. Recent labor trends, many of which are fueling the Great Resignation, have shown leaders across industries that their employees are looking for more.

Learn more

inside track

People like to throw venture capital into Web3 and crypto, but one of the great things about VCs is that they’ll stick with you through tough times, says Fred Wilsonciting the example of Dapper Labs, which had to go through a crypto winter before hitting hard with NBA Top Shot.

For Web3 projects with potential future tokens, SAFTs, the crypto equivalent of a SAFE, are less popular now than token cover letters, especially for US companies, says Robin Ji. He gave a detailed overview on how to approach them.

The current decline in multiple SaaS may resemble the tech downturns of 2000 or 2008, but likely won’t be as bad as either, said Jason Lemkin. Still, the next few months could be the worst time to raise growth capital.

must know

GM bought out SoftBank’s stake in Cruise. Vision Fund 1’s stake in the self-driving company was sold for $2.1 billion.

Oyo could halve its IPO. The SoftBank-backed company initially had a target of $12 billion. It could even cancel its listing in India.

Fund caps are so 1990s. Venture capital funds are raising more and more, so why bother with a cap on fund size? Answer: So LPs know that the size of the fund matches the strategy.

From the protocol: Swedish startup Normative showed off a free version of its carbon emissions tracker, which it created to help relatively small businesses get a basic understanding of their emissions. Also: Discover our new Protocol Climate newsletter!

Your reading of the weekend: Telegram thrives during Russian media crackdown.

A MESSAGE FROM PLURALSIGHT

Tech organizations need to look internally to find the talent they seek by upskilling and reskilling their existing tech workforce. To make this vision a reality, organizations need to focus on being creators rather than consumers of talent.

Learn more

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