The OCC’s directive for Venture Lending - what it means for entrepreneurs and investors
The era of easy fundraising for tech firms is over is alive and well — if you know where to look.
On the surface, the market seems bleak. VCs have pulled back. Angels are few and far between. Previously startup-friendly banks were spooked by the March ‘23 collapse of SVB. And now, a key U.S. banking regulatory agency has issued guidance for banks to further tighten their venture lending standards.
It has been a challenging time for firms to raise equity since rates began to rise in early 2022 — it’s now getting harder to raise debt, as well.
OCC to commercial lenders: Tread lightly with venture loans
In November 2023, the U.S. Office of the Comptroller of the Currency (OCC) – a US Treasury bureau responsible for safeguarding the banking system – issued a detailed bulletin to banks signalling increased scrutiny of venture loans to early-, expansion- and late-stage companies.
This guidance applies to the banks that the OCC regulates (namely all national banks and Federal Savings Associations), and relates specifically to commercial lending to high-risk, generally venture-backed companies.
The bulletin does not specifically prohibit banks from issuing venture loans. Instead, it highlights the importance of well-defined underwriting, risk-rating, loan monitoring, liquidity risk management, and stress testing procedures for banks issuing debt to what the OCC refers to as “high-risk commercial borrowers”.
The OCC bulletin does promise increased supervisory scrutiny, however. “OCC examiners will scrutinize loan commitments that are underwritten without an adequate assessment of the borrower’s capacity to repay and will determine whether such loans should be subject to supervisory criticism.”
Whether this is one-off guidance or a sign of much more to come remains to be seen.
Reading between the lines: Don’t be the next Silicon Valley Bank, please
While the bulletin doesn’t specifically call out the bank runs and market panic that led to the collapse of SVB and others in early 2023, it’s clear that this OCC directive is a warning to banks considering stepping into the suddenly-less-crowded commercial venture lending space.
The collapse of SVB did leave a substantial hole in the market, particularly for tech companies. The former mega-lender was integral to Silicon Valley’s financial infrastructure, serving both tech firms and VCs alike.
Banks are right to smell opportunities here. The OCC directive is simply calling out the risks of venture lending, and warning banks that increased scrutiny is coming.
So… where should tech firms turn?
For tech entrepreneurs looking for funding, the outlook is wildly different than it was just a year ago.
Equity rounds have been underwhelming, to say the least.
Surging rates have made traditional debt products increasingly costly to service.
And with this recent guidance, it’s unclear whether banks will even pick up the phone for startup and growth-stage tech founders.
For entrepreneurs seeking capital – whether it's to grow their business, refinance existing debt, or extend their runway – Coho Growth can help. We champion the sustainable growth of software companies through debt financing. Our team of specialists have lent a total of $200 million to 71 companies.
Our expertise, risk capacity and tech-first mission statement allow us to serve the very companies hurt most by these recent market shifts.
The opportunity for savvy investors
The increased demand for debt capital provides an opportunity for investors to lend to software companies and be rewarded for the risk they take on.
But as the OCC warning highlights, only specialist lenders should be offering debt capital to tech companies. When Silicon Valley Bank collapsed, some banks saw an opportunity to step in. Unfortunately, many lacked the experience and subject matter expertise to lend to venture-dependent tech companies and as a result, may have closed deals where the risks were misunderstood.
The Coho Growth team has 35 years of combined tech and investing experience. We are highly selective about the companies we fund, working specifically with businesses that have reached a level of product-market fit where they’re investing in growth and can see a flywheel developing.
Get in touch today to join Coho Growth in redefining debt financing in the tech industry.
The tech funding paradigm is shifting. Are you ready?
For founders and investors alike, the tech funding ecosystem is in the midst of a radical shift.
Technology firms have always been integral to driving innovation. Now, it’s time for funding solutions that match that same level of ingenuity.
Contact us today to see how Coho Growth can help you reach your funding goals.
Mark Bakker
General Partner
Coho Growth