The spate of underwhelming IPOs coming from Silicon Valley's tech companies have everyone from investors to founders second-guessing. Is the market in a bubble? Are private valuations too high? Are direct listings the answer?
Blair Silverberg thinks he has the answer. The former Draper Fisher Jurvetson investor noticed that tech startups tend to take on significantly less debt in a run up to an IPO than other privately funded companies. So he left the Silicon Valley VC firm to start his own company, Capital, which announced on Wednesday it had $100 million to sink into the next generation of tech startups.
"If you look at the disappointing IPOs recently, that's not something that happens if you build the balance sheet normally," Silverberg told Business Insider. "But it happens all the time in venture, and nowhere else. It's a really unusual financial fact about this growing and accelerating part of our economy."
Capital is the most recent entrant in a new subcategory of high-flying fintech startups, like Brex and Clearbanc, that specifically cater to financing other privately backed companies, albeit with minor differentiating points. Clearbanc, for example, works on a revenue share model to fund new companies. Brex is slightly different, in that its flagship product is a corporate card for young companies but has since expanded to other finance products. But some point to this rise as proof that Silicon Valley is entering peak-bubble, similar to that in the early 2000s. Others say the rise in alternative funding is proof that founders are becoming uneasy with venture capital.
"The core fundraising process, where you raise tens of millions of dollars, has changed very little since the beginning of venture capital," Silverberg said. "These founders are spending six months in a full-time fundraising job, but they still don't have all the numbers that investors do."
Silverberg's vision for Capital seeks to correct this, and as a former investor at DFJ, a prominent early-stage venture firm in Silicon Valley, he might have the insider knowledge to make it work. He launched the company with a $100 million fund and plans to fund middle-stage companies, either Series B or later, with debt financing ranging from $5 million to $50 million. Capital works with what Silverberg called a "guidepost" in The Capital Machine, software that underwrites each company's financial data to give founders a better idea of which deal is in their best interest. That's part of the draw to debt financing, Silverberg said, because it doesn't carry the usual dilution a venture capital round would.
"Credit tends to be quantitative," Silverberg said. "So, as an investor, you care less about the personal brand of founders, and as debt is more acceptable you will have less bias in where the founder went to college or other limiting factors like that. It makes funding more equitable, and that's clearly good for the economy at large."
Debt can't save an overhyped, overvalued tech startup, Silverberg said. But it can make founders more responsible with the funds they do have and instill the discipline to pursue sustainable growth, challenges that many VC-funded companies don't address until after they become publicly traded, he said.
"If you look at every IPO and calculate what the founders would have earned with debt, it's clear as day that more debt is better for them," Silverberg said. "What we think of as risky venture-backed businesses are really just traditional businesses with traditional models that are using internet and mobile, so they should not be penalized with incredibly expensive, equity-only options. We need new financing models for these new economy businesses.