Hercules Capital Taps Naomi Cheng as Managing Director

Hercules Capital, the publicly traded specialty finance firm focused on venture growth lending, has hired Naomi Cheng as Managing Director, the company announced this week. Cheng joins from Silicon Valley Bank, where she spent more than 15 years building relationships with venture-backed companies and their institutional backers—experience Hercules is betting will help it deepen its foothold in the competitive growth debt market.

The move comes as Hercules, which trades on the NYSE under ticker HTGC, has deployed record capital over the past 18 months. The firm closed $1.2 billion in new commitments in Q3 2023 alone, up 34% year-over-year, according to its latest earnings report. That growth has come despite a broader pullback in venture funding, suggesting Hercules is gaining share as traditional equity investors turn cautious.

Cheng's hire isn't just about adding capacity. It's a signal that Hercules sees opportunity in the current market dislocation—when equity is scarce, debt becomes essential. And when debt becomes essential, relationships matter more than rate sheets.

What's less clear is whether Hercules can maintain its underwriting discipline while scaling this aggressively. The firm's portfolio has historically skewed toward later-stage, VC-backed companies with clear paths to profitability or exit. But as competition heats up—Trinity Capital, Horizon Technology Finance, and a wave of credit funds are all hunting the same deals—there's pressure to move upmarket or take earlier bets. Cheng's SVB pedigree suggests the former.

Cheng spent over a decade and a half at Silicon Valley Bank, most recently as a Managing Director in the bank's Innovation Banking division. That group—essentially SVB's venture debt arm—was known for getting into deals early, often alongside top-tier VCs, and for maintaining unusually tight relationships with both founders and fund managers.

SVB's collapse in March 2023 scattered that talent across the industry. Some went to First Citizens, which acquired the bank's assets. Others joined venture firms or started their own funds. Cheng's move to Hercules is part of a broader migration: experienced lenders who spent years inside the venture ecosystem are now landing at specialty finance firms that can pay closer to private equity comp structures.

At Hercules, Cheng will focus on sourcing and underwriting growth-stage debt deals, particularly in sectors where she has deep domain expertise: software, fintech, and healthcare technology. She'll report directly to the firm's co-founders and work closely with Hercules' existing team of sector-focused MDs.

Her Rolodex is the asset. SVB's model was predicated on being the first call when a founder needed banking, debt, or an introduction. Cheng reportedly worked with hundreds of companies over her tenure, many of which are now in the growth stage Hercules targets—$20M+ in revenue, institutional backing, and 12-24 months from a liquidity event or profitability.

Hercules Capital has been on a deployment tear. The firm, which went public in 2005 as a business development company (BDC), specializes in providing senior secured loans to venture-backed companies, typically in the $10M-$50M range. Unlike traditional banks, Hercules can take warrant coverage—giving it equity upside if a portfolio company exits.

That model has performed well in the current environment. With equity valuations down and VCs doing fewer deals, growth-stage companies that might have raised equity 18 months ago are now taking debt instead. Hercules has been a primary beneficiary.

As of Q3 2023, Hercules had $3.4 billion in total commitments outstanding across 115 portfolio companies. The weighted average yield on its debt investments was 14.2%—high by historical standards, reflecting both rising base rates and tighter credit spreads in the venture debt market.

But scale creates risk. The firm's non-accrual rate—loans where the borrower has stopped paying interest—ticked up to 1.8% of the portfolio in Q3, from 1.2% a quarter earlier. That's still low compared to traditional middle-market lenders, but it's worth watching. Hercules underwrites to companies that are pre-profitable, and in a slower exit environment, some of those bets won't work.

Source: Hercules Capital Q3 2023 Earnings Report

Hercules doesn't just make money on interest. Like most venture lenders, it takes warrant coverage—typically 5-15% warrant coverage on the loan amount, meaning if Hercules lends $20M, it might receive warrants to purchase $1M-$3M worth of equity at the current valuation. If the company exits at a multiple of that valuation, the warrants can generate IRRs well above what the debt alone would produce.

Bringing on a senior-level hire from SVB's Innovation Banking group isn't subtle. It's a bet that the venture debt market is entering a prolonged growth phase—and that the firms with the deepest relationships will capture the best deals.

Hercules has historically competed on terms, speed, and sector expertise. But as the market has gotten more crowded—credit funds like Blackstone Credit, Goldman Sachs Alternatives, and Ares have all launched or scaled venture debt practices—differentiation increasingly comes down to who knows the ecosystem. Cheng knows the ecosystem.

There's also a defensive element. SVB's implosion left a vacuum in the market. First Citizens acquired the loan book, but it didn't acquire the culture or the talent. Hundreds of SVB clients—particularly those who relied on the bank for venture debt—are now shopping for new lenders. Hercules, Trinity, and Horizon have all been aggressively hiring and marketing to that displaced client base.

Cheng's hire gives Hercules a direct line into that group. She's worked with many of them for years. She knows their cap tables, their burn rates, their growth trajectories. In a relationship-driven business, that's hard to replicate.

The risk is execution. Hercules is adding portfolio companies faster than it's adding senior underwriters. The firm has made roughly 40 new commitments in the past six months, according to its disclosures. That's a lot of diligence, a lot of monitoring, and a lot of potential for something to slip through.

Hercules' portfolio is concentrated in three sectors: software (38% of commitments), life sciences (29%), and technology services (18%). The remainder is split across hardware, consumer, and financial technology.

That weighting makes sense given Cheng's background. SVB's Innovation Banking group was heavily tilted toward enterprise software and healthcare tech—both markets where venture debt has proven product-market fit. These are categories where revenue growth is predictable, gross margins are high, and exits are frequent enough to keep warrant portfolios performing.

Hercules isn't the only lender scaling aggressively. The venture debt market has become significantly more competitive over the past 24 months, driven by three forces: rising base rates (which make floating-rate debt more attractive to lenders), a slowdown in equity fundraising (which increases demand from borrowers), and an influx of capital from credit-focused asset managers looking for yield.

The traditional venture debt players—Hercules, Trinity Capital, Horizon Technology Finance, and Western Technology Investment—are now competing with large credit funds that have far more capital to deploy but less sector expertise.

That dynamic creates an opening for Hercules. Large credit funds can win on price, but they often struggle with speed and sector knowledge. A firm like Hercules, with a team of sector-focused MDs who can underwrite a deal in two weeks and speak the language of venture-backed founders, has a structural advantage in deals where speed and certainty matter.

Cheng's hire is part of that strategy. She brings relationships that took a decade and a half to build—relationships that can't be bought or replicated by a credit fund entering the market.

Venture debt typically sits between equity and traditional bank debt. It's senior secured, meaning it's first in line if the company liquidates, but it's structured to be non-dilutive to founders and existing investors. The trade-off is cost: venture debt typically carries interest rates of 10-15%, plus warrant coverage, compared to 5-8% for traditional bank loans.

For growth-stage companies, the math often works. If you're burning $3M/month and your next equity round is 12 months out, a $20M venture debt facility can extend your runway without giving up another 15-20% of the cap table. And if you hit your milestones, you raise equity at a higher valuation—making the debt much cheaper than it would have been to raise equity early.

Cheng is part of a wave. When SVB collapsed, roughly 200 professionals in the Innovation Banking division—the venture debt and VC relationship arm—suddenly found themselves without a platform. First Citizens acquired the assets and offered packages to retain staff, but many left anyway.

Some joined venture firms. Others went to startups they had worked with as bankers. A significant number, like Cheng, moved to specialty finance firms or launched their own credit funds. The talent dispersion has been one of the most significant reshufflings in Silicon Valley finance in a decade.

Source: Industry estimates based on public announcements and LinkedIn data, March-December 2023

For Hercules, the timing couldn't be better. The firm is scaling at exactly the moment when top-tier talent is available—and motivated. Compensation at a publicly traded BDC like Hercules can compete with what senior bankers were making at SVB, especially when equity upside is factored in.

For the 115 companies currently in Hercules' portfolio, Cheng's arrival is mostly symbolic—she's not taking over portfolio management. But for prospective borrowers, it's a signal that Hercules is serious about deepening its relationships in software and fintech, the two sectors where SVB had the strongest foothold.

Expect Hercules to start showing up in deals it might have passed on a year ago. Cheng's presence gives the firm credibility in circles where it was previously seen as a second-tier option behind SVB or traditional venture lenders. That credibility translates to deal flow—and in venture debt, deal flow is the entire game.

The other shift to watch: Hercules moving earlier. Historically, the firm has focused on companies with at least $20M in revenue. But as competition intensifies for later-stage deals, there's pressure to move downstream. Cheng's SVB experience included working with Series A and Series B companies—earlier than Hercules typically plays. If the firm starts doing smaller, earlier deals with higher warrant coverage, that's a strategic pivot worth tracking.

Whether that pivot happens depends on how much risk appetite Hercules' public shareholders are willing to tolerate. BDCs trade on yield and credit performance. Moving earlier would likely increase both returns and losses. The question is whether the net result improves the portfolio's risk-adjusted performance—or just adds noise.

Cheng's move is a data point in a larger story. Venture debt used to be a niche product. Now it's becoming table stakes. Every growth-stage company is at least considering debt as part of its financing strategy, and the supply of capital willing to provide that debt has exploded.

That's partly a function of rates. At near-zero rates, lending to venture-backed companies at 10-12% didn't make sense for most institutional investors. At 5%+ base rates, suddenly it does. Add in warrant upside, and the return profile starts to look like early-stage venture equity—without the binary risk.

The result is a market that's both larger and more competitive than it's ever been. And in competitive markets, the firms with the deepest relationships and the fastest execution win. Hercules is betting Cheng gives them both.