Financing the Future

Venture debt provides key funding to Southern California deep tech startups

When the federal government shut down for six weeks last year, agencies like NASA and the National Science Foundation had to delay processing, scoring and distributing new grant awards. For some startups in the aerospace and defense sector that relied on those funds, they turned to venture debt in order to mitigate the impact on their operations.

“So often, things don’t go entirely to plan. Venture debt is intended to be a complement and enable a company to get further in a plan than you would have without the debt,” said Marc Cadieux, president of Silicon Valley Bank. “We’re seeing it happen with much greater frequency.”

The lapse in appropriations during the shutdown disrupted funding disbursements, key grant application cycles and program evaluations. While that may be an uncommon scenario, venture debt has become an increasingly important part of the capital stack for startup founders and their investors to retain equity stakes while diversifying and adding capital to support investments in real estate and manufacturing capacity.

Many of these companies are effectively pre-revenue or have limited revenue from government grants and commercial operations. Revenue is not typically considered by the lenders, but a company’s business plan is significant, and those focused on “dual use” applications, where revenue can be generated from both the government and commercial sectors, are increasing in prevalence.

A recent report from Runway Growth Capital and industry researcher PitchBook said that venture debt accounted for $68.8 billion across more than 1,000 transactions in the U.S. last year, up from $61.5 billion in 2024. The landscape of venture-backed firms has increased and these loans tend to perform better than other types of lending. Plus, the lenders may take “warrants” that provide additional income should companies succeed.

“Venture debt is the best performing out of all private asset classes. There are lots of banks focused on the space. New banks formed this year and there are a lot more players in the market,” said Matt Schwartz, practice group leader of DLA Piper’s U.S. Finance Group. “Some of the key areas for lenders are defense tech, aerospace, AI, drones, satellites, life sciences and data centers. It’s the technologies that are driving the current economy.”

Silicon Valley Bank is a leader in this space, and its brief collapse in 2023 led other banks to expand into the sector. For example, San Diego-based Axos Bank hired a team of 11 people led by Rod Werner in 2024 to establish a technology and life sciences banking division. The group has dedicated teams in Palo Alto, San Francisco, Boston, New York and Los Angeles with a focus on software, AI, fintech and healthcare IT sectors. They support venture capital and private equity firms and their portfolio companies with recurring revenue lines of credit, term loans for mergers and acquisitions, as well as treasury management solutions for startups, growth-stage companies and fund sponsors.

Others, however, consider these loans to be risky and do not compete even as they have bankers who specialize in other work with technology startups. Los Angeles-based City National Bank had a team that worked with startups on venture loans, but that program was canceled after the bank was acquired by Royal Bank of Canada in 2015. At the time, Royal Bank of Canada felt that venture debt was too risky and the bank ceased making these loans. A bank spokesperson confirmed that it still does not make venture debt loans to this day.

For the banks, venture debt differs from traditional asset-based lending because the bank does not utilize collateral in the same manner. Rather, it makes loans based on a variety of factors that include the value of a company’s intellectual property and the group of institutional investors that supported early venture rounds. These institutional partners have relationships with the banks and private capital lenders, whereas an entrepreneur may not have those relationships. That establishes a track record for companies that might not otherwise qualify.

“Since the investment in the frontier tech space keeps getting earlier, we work with pre-seed and seed stage companies. The uses have become different and the bank has had to adjust with companies funded by the U.S. government,” said Phil Iacono, vice president of Silicon Valley Bank, who works with Southern California deep tech companies.

At Silicon Valley Bank, the bank’s acquisition by Raleigh, N.C.-based First Citizens Bank has led to a larger focus beyond the tech sector because the national bank has expertise in areas that complement Silicon Valley Bank’s focus. First Citizens integrated Silicon Valley Bank and will rebrand it, along with other acquisitions, in the fourth quarter of this year. Silicon Valley Bank will rebrand to First Citizens Innovation Banking, and SVB Global Fund Banking will be renamed First Citizens Fund Banking, among the announced changes. While the name will change, the focus remains on providing services to meet the needs of the startup ecosystem.

“From the day we reopened, we were making the same loans and dollar amounts. We were right back at it in late March 2023 and that has continued to the present,” said Cadieux. “We added capabilities with the teams from First Citizens. We are more robust from that perspective. Putting us together has been powerful.”