Huntington Capital and Other Venture Lenders Thriving, Despite Credit Crunch
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also gives them more flexibility in making loans when commercial banks are tightening up on loan requirements.
Of course, venture lenders also seek higher rates of return—so their business operates somewhere between conventional lending and venture capital investing.
In this respect, Huntington resembles a venture capital firm because it raises funding from limited partners (the people who have contributed to its $80 million fund) such as pension funds, insurance companies, and other institutional investors.
Founded in 2001, Huntington typically lends to well-established small businesses and medium-sized companies that are privately held. The firm’s loans range from $1 million to $5 million, and the average deal size is about $3 million, Bubnack said.
Hercules Technology typically makes larger loans, which were about $5 million to $7 million in the second quarter, Henriquez says. The public company based in Palo Alto, CA, reported venture loans of $229.6 million and venture investments of $6.4 million during the three months ended June 30.
Huntington gets higher returns on its loans by offering borrowers alternative methods to repay their debt—such as combining conventional loan payments with warrants, which can be converted to stock, or through supplemental “royalties,” which are payments tied to increased revenue.
Huntington operated initially as a government-backed small-business investment company, and provided about $34 million to 26 companies—all as loans. Bubnack, who wants to raise $100 million for Huntington Capital II, says no government funding went into its second fund, which will make both loans and venture investments.
Huntington generally avoids early stage technology startups because it prefers borrowers with annual sales that range between $5 million to $50 million, and because Huntington often joins in lending deals with bigger commercial banks. Bubnack says their customers often are “bootstrapped” companies that bypassed venture capital funding, oftentimes because the borrowers didn’t want to share the ownership of their company with venture capitalists.
Yet two deals this year involved technology companies, Bubnack said. One involved an undisclosed equity investment in LifeModeler, a six-year-old software developer in San Clemente, CA, that provides computer-based modeling of human body movement. The software is used in preparation for orthopedic joint replacement surgeries, and for biomechanical modeling by sporting goods developers and others.
Huntington also provided a loan to DR Technologies, an employee-owned aerospace and defense engineering company that specializes in designing and making structural components and subsystems using composite materials.