SVB Kept Up With Fast-Paced Health Startups. The New Normal May Be Slower

It is often difficult to explain why , which does business with about half of all venture-backed startups in the U.S., was the bank of choice for many. It was only the 16th-largest financial institution in the country, but easily the largest piece of infrastructure for the startup ecosystem.

Companies in the life sciences and health care space relied heavily on SVB, with about 12% of the bank鈥檚 $173 billion in deposits belonging to companies in that sector.听

That鈥檚 because Silicon Valley Bank didn鈥檛 operate like traditional banks 鈥� it matched the fast-paced startup network by being fast and nimble itself. It swiftly supplied startups with loans during periods of high growth. It took on companies that were so novel and innovative they didn鈥檛 have traditional product market fit. Traditional banks were more risk-averse and didn’t understand emerging tech the way SVB did.听

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With the loss of SVB, investors worry the startup innovation system may have to slow down to meet its new, slower lenders.听

鈥淚 think lenders will be more conservative in their banking approach with clients, especially ones that are in emerging tech, biotech and life sciences,鈥� said , a biotech investor and managing general partner at .

When COVID hit, SVB moved fast

In 2020, when California issued a stay-at-home order to everyone except essential workers as a result of the pandemic, the private sector took action.

Medtech companies quickly pivoted to meet the surge in demand for testing. Some popped up testing sites on city curbs while others developed easy-to-use scheduling apps. Other companies helped physicians bring their practice into the telehealth age.

Companies in the life sciences moved in to fill gaps in creating therapeutics, vaccine support products and real-time diagnostics.听

鈥淭hose companies expanded,鈥� said , co-managing partner at . 鈥淚n the middle of the pandemic, SVB moved to support these companies at lightning speed in a way that larger institutions simply could not.鈥�

By contrast, traditional banks moved more slowly, taking longer to approve loans for startups. They turned away young founders who didn鈥檛 have a robust credit history. U.S. immigrants, who weren鈥檛 citizens, would have a much harder time banking their company at the larger firms.听聽

鈥淚 think it’s difficult for people to remember how unbelievably conservative mainstream banking was,鈥� Ocko said.听

Biggest losers: emerging technologies

SVB was also a safe haven for startups that were so novel, they didn鈥檛 meet traditional risk assessments that bigger banks used.听

Big banks have a fiduciary responsibility to be conservative about their investments. Many nascent companies, especially in their infancy, don鈥檛 have product market fit as a result of being so new. This was especially crucial for companies in niche and risky industries like biotech, which often take 10 years or more before ever turning a profit.听

鈥淭hey were good at lending in one form or another to two startups pursuing what, to the rest of the world including big banks, would be very arcane, difficult to understand technology,鈥� Ocko said of SVB.听

This is how SVB became the bank of choice for the startup world. With decades of expertise in the tech industry, SVB was better able to understand the risks of these companies. When founded the gut microbiome and at-home diagnostics startup in 2016, he chose SVB as his sole bank at the behest of his investors.

鈥淚n the early days of SVB, they were willing to grant the startup companies that were not profitable,鈥� Jain said. 鈥淢ost traditional banks would only give you a loan when you had assets, or you had profit, whereas SVB was willing to give loans to companies that they thought [were viable].”

Without it, it may become harder for startups in emerging markets to grow.

鈥淚 think there may be an impact on innovation as many companies will have a harder time getting financing, and as a result [may] have to declare insolvency due to a lack of capital,鈥� said Crean. 鈥淥verall, investors will be even more cautious about the sector.鈥�

A drag on innovation

Without SVB, many companies are migrating towards traditional banks.

It鈥檚 hard to tell, materially, how this will impact innovation in the tech sector. SVB quickly provided loans to startups that won defense contracts, or startups that signed partnerships with other companies. SVB quickly allowed companies to open research and development labs, start a manufacturing facility for a new product, or start new projects.

Since other banks move more slowly, companies may have to forgo contract offers if they can鈥檛 get a loan. That will quickly impact when a company will be able to raise its next round of funding, and how much it will get.听

Overall, SVB鈥檚 demise could force Silicon Valley to adjust to a new normal 鈥� one that is slower-paced, matched with that of most banks.

鈥淥ne of the knock-on effects of SVB not being around as an institution is all of that accumulated expertise lived in the people of SVB,鈥� Ocko said. 鈥淭here aren’t binders that a giant bank inherits that tell you step-by-step how to support a radical lifesaving biotech company.鈥�