Mercury’s venture debt product joins a crowded market

Debt vs. equity

Macro uncertainty with the war in Ukraine, rising inflation and volatility in public markets have caused some late-stage investors to reassess their strategies and deals. But their jitters haven’t slowed the market for venture debt. If anything, the dithering over valuations has made loans to venture-backed firms more attractive as a short-term financing strategy — a bridge to a time when conventional equity is easier to secure on attractive terms.

The fast-growing venture debt business has attracted a new player. Mercury, a startup that provides banking services to startups, just launched an offering.

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

Capital is competing to lend to hot startups. As valuations have ballooned, startups have been in the position of leverage.

• SVB is a major competitor for Mercury, as are banks like Comerica or Bridge. Then there are dedicated firms like WTI, Hercules and TriplePoint. And other startups like Brex have entered the market, too.
• The number of startups taking venture debt more than tripled over the last 10 years, according to Pitchbook.
• Even as the macro environment has shifted, interest in venture debt remains strong for different reasons, Akhund said. “You don’t know what the environment’s gonna be like in 12 months and having an extra 20% or 50% cushion” gives more options, Akhund said.

• “Given the ‘risk-off’ investment environment we’re currently in, founders may find themselves having a harder time raising significant equity capital compared to a few years ago,” said Benjamin Wu, CEO of Brex Asset Management, which launched venture debt last August. “Having access to venture debt allows businesses to continue extending their runway, accelerate their growth and stay ahead of the competition without relying on traditional funding sources.”

With so much capital, seemingly every niche has its own lending option. With capital seeking growth investments, venture debt isn’t the only startup borrowing option.

• ClearBank and Wayflyer offer financing for marketing costs for startups, with up-front cash that is repaid through ecommerce sales. Pipe and Capchase offer similar services for SaaS companies with predictable recurring revenue.
• Mercury offers a guide that includes Capchase and Wayflyer to help founders find whatever funding best suits them, Akhund says. “I want entrepreneurs to get the best thing for themselves,” he said.
• A new area for fintech startups is warehouse lending for early stage startups. This form of financing, which provides cash for loans, is common for larger lenders in the mortgage business but is now being offered to younger startups for business purposes, said Ben Narasin, founder of Tenacity Venture Capital.

Of course, debt carries its own risks. Venture debt is ideally used for things such as equipment, data centers or leasing, not operating costs.

• That said, if a founder is very confident another term sheet is coming soon, venture debt can make sense, according to Narasin, who previously headed equity investments at venture debt shop TriplePoint Capital.
• Venture debt, like other debt products, typically is first in line before equity holders if liquidations occur. “Debt isn’t equity,” Narasin said. “Not all entrepreneurs grok that. A knife is a tool but a weapon in another person’s hand.”
• And bridge loans to get to 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 risk-on environment, venture debt can be another helpful tool in the tool kit for founders. But founders should be aware of the risks. Handle sharp objects carefully.

Overheard

VCs and journalists are fighting (again) on Twitter about anti-tech tech stories, and it’s … insidery? Part-time media critic Marc Andreessen took a break from posting Jack Dorsey memes to complain about a Business Insider story on problems at Glossier that he deemed a “hit piece.” Full disclosure: Axel Springer owns BI publisher Insider Inc. and Protocol. Fuller disclosure: Andreessen was an early investor in Insider.