| The unraveling sub-prime mortgage market has | | | | off from essential equity and debt capital sources. |
| spewed its wreckage across a vast cross section of | | | | Similarly, large diversified finance companies with |
| the financial markets. Investors and lenders continue | | | | start-up loan portfolios reeled from mounting portfolio |
| to smart from massive losses on investments and | | | | losses. Venture lending groups within Transamerica, |
| loans tied to this market. As some scramble to | | | | DVI and GATX eventually folded or were jettisoned |
| assess the implications of the sub-prime meltdown, | | | | as a result of the turmoil. Smaller, private lenders |
| many investors and lenders have either abandoned | | | | were largely closed off from new funding to support |
| higher risk asset classes or are approaching them | | | | their venture transactions, forcing many of them to |
| with great caution. | | | | abandon lending to start-ups or to liquidate their |
| Residing in a far corner of the financing panoply is a | | | | portfolios. The few lenders and leasing companies |
| financing vehicle known as venture lending. This form | | | | that remained gravitated to more stable segments of |
| of financing is used by start-ups supported by | | | | the market. Many curbed their volume dramatically by |
| venture capitalists as a means of funding working | | | | focusing on smaller, better collateralized transactions. |
| capital and equipment acquisitions. A less expensive | | | | Banks and investors that supported venture lenders |
| form of financing than venture capital, start-ups use | | | | also reeled from the fallout. As several lenders either |
| these loans to extend the runway between equity | | | | collapsed or faltered, the banks and investors that |
| rounds and to avoid ownership dilution. | | | | financed these companies realized huge losses. As a |
| Venture lending is in the midst of a strong rebound | | | | result, many lenders and investors began to shun |
| that started in 2003. This segment is recovering from | | | | start-up lenders and other risky transactions. |
| a sharp decline that followed the bursting of the | | | | Today, havoc in the sub-prime lending market and a |
| 'New Economy' bubble earlier in the decade. During | | | | possible economic slowdown threaten to derail |
| the late 1990s, prior to the bubble burst, equity | | | | venture lending. Some of the same lenders and |
| investments in start-ups topped $100 billion. That | | | | investors who participate in the high-risk end of the |
| staggering amount of investment stoked | | | | securitized mortgage arena also participate directly or |
| unprecedented growth in debt transactions to | | | | indirectly in financing these lenders. These financing |
| start-ups, which reached almost $ 5 billion during the | | | | sources are now running scared. |
| same period. The technology meltdown and | | | | Lastly, most lenders to start-ups rely heavily on their |
| economic slowdown that followed caused start-up | | | | borrowers receiving multiple equity rounds to achieve |
| lending to contract to around $836 million by 2003. By | | | | loan repayment. During the technology meltdown of |
| 2006, as the market steadily improved, loans to | | | | 1999-2002, many venture capitalists focused almost |
| start-ups recovered to around $ 2.5 billion. | | | | exclusively on supporting the most promising |
| Although venture lending is rebounding, it appears as | | | | companies in their portfolios. The weaker portfolio |
| vulnerable today as it did at the beginning of the | | | | companies were subjected to a Dr. Kevorkian-style |
| decade. Earlier in the decade, a confluence of factors | | | | triage process that saw many of them abandoned. |
| sent shock waves through the start-up lending | | | | As a result, many of these start-ups starved from |
| segment. Rising failures and delinquencies by | | | | the lack of capital and failed. If this process is |
| start-ups, a slowing economy, a contraction in | | | | repeated, assuming there is an economic slowdown, |
| venture capital investing, overaggressive lending | | | | it could spell big trouble for venture lenders. |
| practices and questionable lender business models | | | | Will venture lending become an unwilling victim of the |
| sparked widespread faltering in this lending segment. | | | | sub-prime debacle -- one of the minor rail cars |
| Publicly-held venture lenders like LINC Capital and later | | | | dragged by the sub-prime locomotive over the |
| Comdisco, that embraced this segments higher yields, | | | | proverbial cliff? Only time will tell. Much will depend on |
| rapid growth rate and favorable perception on Wall | | | | the performance of the economy during 2008 and on |
| Street, were slammed by investors. Ultimately, these | | | | the responses of the banks, institutional investors, |
| companies foundered as their losses mounted, they | | | | start-ups, venture capitalists and the lenders who |
| violated their credit agreements, and they were cut | | | | participate in the start-up market. |