One year after Silicon Valley Bank’s implosion, the venture debt market has yet to crown a new king.

When the bank, which held accounts for almost 50% of VC-backed tech and life science companies in 2022, collapsed on March 10, 2023, the impact saw widespread financial panic among startups and in related markets.

VC-backed companies were left uncertain about whether to stick with SVB, which was taken over by First Citizens Bank, or to borrow from another kind of venture debt player: the non-bank lender.

Unlike banks, which issue loans using customer deposits, non-bank lenders use LP capital to issue venture debt to VC-backed companies. For example, business development companies are typical non-bank lenders that originate loans to venture-backed companies.

In the immediate aftermath of SVB’s fall, many startups turned to non-bank lenders to sidestep similar risks of collapse at other banks. But with some time to digest the new normal, private companies are now turning back to banks, which typically offer less expensive loans to companies in need of funds to sustain their businesses.

“Everybody thought non-bank venture lenders would be the big winners from the fall of SVB and they were all going to write checks to SVB’s early-stage customers,” Troy Zander, a partner at Barnes & Thornburg, told my colleague Madeline Shi. “I don’t really think that panned out as we thought it would.”

In the years before the crash, SVB built a portfolio of loans to private, typically VC-backed companies in technology, life sciences and healthcare. This grew to $5.5 billion by 2021. By the time of the collapse, SVB’s venture debt portfolio comprised from 60% to 70% of the entire venture debt market.

In the wake of SVB’s demise, venture debt deal flow plummeted $7.7 billion in total value from H1 2022 to H1 2023, according to PitchBook data.

While performance among non-bank lenders climbed in the aftermath, everything changed at the beginning of Q3 2023, said Duncan Stewart, director of technology, media and telecommunications for Deloitte Canada. Fueled by a recovery in public equities and a foreseeable end to the Federal Reserve’s interest rate hike campaign, banks came back into the VC business.

Banks switched from risk-off to risk-on with lending, Stewart said. With a looser attitude toward lending in their non-core businesses, like venture debt, Stewart said banks began to lend to a small majority of venture debt borrowers.

On top of that, SVB’s market share dropped to an estimated 20%-30% of the market, leaving even more room for banks to take on the fallout.

Stefan Spazek, director of debt placement at Capital Advisors Group, which advises early-stage companies on venture debt financing, said 2023 was a very active year for venture debt bankers in his circle.

In fact, total US venture debt deal value exploded in Q3 2023 and by the end of the year, total deal value had grown by $3 billion from H1 2023.

“SVB was so big that when they became smaller, a lot of other entrants came into the market,” Stewart said.

Somewhere along the way, non-bank lenders got squeezed out by banks and became spooked by the risk of taking on a chunk of former SVB clients amid capital constraints from a still-high interest rate environment, said Stewart.

‘The void was never filled’

Scott Orn, chief operating officer at Kruze Consulting, a San-Francisco-based startup adviser, said that banks likely took the majority of the market share due to pre-existing relationships with borrowers and a lack of knowledge among start-ups about specialty lenders. Before the crash, Orn said, 550 of his 880 clients were borrowers from SVB.

Even at the largest publicly listed BDCs, lending scaled back or grew minimally in 2023.

For example, the fair value of listed venture debt lender Horizon Technology Finance‘s debt investment portfolio fell 2.4% from 2022 to 2023.

And from 2022 to 2023, Hercules Capital, the largest non-bank lender of venture debt, grew its investment portfolio from $2.8 billion to $3 billion, while Trinity Capital’s investment portfolio grew by only $200,000, according to regulatory filings.

But, Orn said, banks aren’t dominating in a significant way; there is still room for specialty lenders.

“There wasn’t a giant boom from other lenders,” Orn said. “They all filled the void in a small way, but the void was never filled.”