Silicon Valley Bank鈥檚 Collapse Will Leave A Big Hole In The Startup World

Any bank collapse can cause jitters in an economy or industry, but 鈥檚 dramatic fall in just a handful of days likely will leave a lasting impact on the tech and startup ecosystem it tried so hard to foster.

SVB was the dominant bank for tech startups and venture debt in the U.S., cultivating a reputation for close-knit relationships with the power brokers of venture and taking chances on young startups that most banks wouldn鈥檛 have the time of day for.

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The bank was founded in 1983 by and with an eye toward backing VC-backed companies 鈥� a still relatively new phenomenon at the time. From there it grew, even surviving the California real estate crash in the early 1990s. It provided banking services for up-and-coming tech companies such as and .

Now, after 40 years, startups will have to look somewhere else for their financial needs 鈥� if such a place exists.

Where deals gets done

SVB wasn鈥檛 just a bank for VC-backed startups 鈥� it was 鈥渢he鈥� bank for such companies. It had relationships with more than 50% of all venture-backed companies in the U.S. and countless VC firms.

Those relationships foster a sense of togetherness in what became a very tight-kit tech industry.

鈥淓verybody wants to talk about venture debt when it comes to SVB,鈥� said one VC whose portfolio companies bank with SVB and had access to their accounts as of Monday. 鈥淭he hole that is left is a lot bigger than just venture debt. The biggest hole is where they really tried to foster a sense of community in tech.鈥�

SVB had a large private wealth management division that had significant synergies with its commercial banking operations 鈥� helping the same VCs and entrepreneurs with home mortgages and personal loans after it just helped their startup close a big financing round.

鈥淚t really connected LPs and GPs and startups all together,鈥� said the VC, adding SVB specifically had a large presence in both Sonoma and Napa as VCs and founders would look for personal getaway retreats from their weekday Silicon Valley jobs.

鈥淚 think you can honestly say SVB was integral to some of the biggest deals in the Valley getting closed,鈥� he continued. 鈥淚t was amazing how much they understood. Sometimes it鈥檚 all about relationships.鈥�

Venture debt

All of that is not to say venture debt did not play a big roll at SVB. One of the reasons SVB became the bank of choice was its venture lending practice. The bank which includes its venture debt.

Venture debt is a type of debt VC-backed companies raise to elongate their cash runways and cut down on dilution 鈥� usually in unison with raising equity.

However, the debt is often less structured and requires fewer financial covenants than other forms of debt.

This became what SVB was known for among startups, and the bank鈥檚 relationships with VCs was pivotal in that venture debt business. SVB did business with a who鈥檚 who of money in the valley, including , and .听

It was those relationships that allowed the bank to take chances on young startups 鈥� knowing the firms it worked with would make it whole again if something went awry, one VC said.

Who steps up?

Now the question is who will replace SVB in the venture debt ecosystem.

, founder of鈥檚 Venture Debt Opportunity Fund, said he expects nonbank lenders to step into the lending space in general 鈥� which happened after the financial crisis of 2008 with firms like and .

Other banks, such as , or , have shown increasing interest in venture and mezzanine debt, but cannot do it the same way SVB was able to due to their size.

SVB took a chance lending to very young seed and Series A startups, something the , a banking regulator that oversees large banks in the U.S.,聽 does not approve of since those companies are not within a year of profitability, said a source.

Other smaller banks also could look to fill the void, but regional banks have taken a pounding after SVB鈥檚 fall. has a growing venture lending business, but it also has been hit hard. It recently took in fresh funding from the and JPMorgan to increase its liquidity.

Other firms like and also could be options for startups looking for debt, but those in the industry say regardless, that form of financing will see a drop off after SVB鈥檚 fall.

鈥淚 think you are going to see venture debt frozen for a while,鈥� said one VC. 鈥淓specially when you look at where interest rates are now 鈥� think there will be a slowdown.鈥�

Coping

While questions remain about who may step into SVB鈥檚 shoes 鈥� if anyone 鈥� startups continue to deal with the fallout of the last several days and what it means for their business.

Seed-funded health care startup has banked with SVB for four years and was one of many startups left scrambling after the bank鈥檚 fall. The company鈥檚 investors include , 1 and .

Like most startups, its biggest risk once SVB fell was meeting payroll for its 43 team members.

鈥淲e aren’t tech elite or the technologists with salaries greater than Pair Team’s entire payroll; we are single moms, grandparents, students, sole breadwinners for their family. Even one day without a paycheck is devastating,鈥� said, co-founder and COO of Pair Team, via email to SA国际传媒 News.

Pair Team has since opened two new bank accounts and has to provide new banking details to all of its vendors and customers to ensure payments.

鈥淭he failure of SVB should be a warning sign to other banks, politicians, investors, businesses, and even consumers to understand the financial viability of a system we all rely on,鈥� said Choi. 鈥淲hen SVB started crashing on Thursday, it created a significant impact on the startup/tech industry as a whole, but on the other side of bank statements, there are real people,鈥� she said.