The Silicon Valley Bank ski trip to Deer Valley was one of the biggest annual networking events for technology start-ups before the bank failed last March, the largest bank to collapse since the global financial crisis.
Without missing a year, the party on the Utah slopes will go ahead this month as First Citizens — the North Carolina bank that acquired SVB from bankruptcy — jostles with the likes of JPMorgan, HSBC and Stifel for a share of the “innovation economy”.
“A year later, it feels eerily similar to pre-SVB downfall,” said Peter Hébert, chief operating officer at $5bn Silicon Valley venture firm Lux Capital. “Whatever gaps would have existed in the near term have very quickly been filled.”
For three decades, SVB was the central financing institution for technology and life sciences start-ups in the US. As it collapsed, about $130bn of its deposits and teams of its bankers headed for the comparatively fortress-like balance sheets of larger rivals.
The landscape for day-to-day banking of the venture capital ecosystem is more competitive than before SVB failed. But the core of the bank’s role was its high-risk appetite for underwriting loans to pre-revenue or lossmaking start-ups based on the strength of their venture capital backers and the likelihood they would continue to invest.
Despite the flood of new options, fledgling technology companies are in some cases struggling to get the same access to capital that powered the booming venture market for two decades. None is as appealing as the “one-stop-shop” linchpin to the venture community SVB had been.
“Venture lending has really bifurcated into two different businesses — early-stage lending and late stage or growth lending,” said David Spreng, founder and chief executive of Runway Growth Capital, a lender to venture-backed start-ups.
SVB specialised in the early-stage market where many larger banks had stayed away because of the risks involved.
“A lot of people have raised their hands and said we’d like a part of this business, but nobody has put a flag in the ground and said we’re going to become the next SVB,” Spreng said.
Often SVB loaned money in exchange for equity in the start-ups themselves, operating with a mentality closer to the venture economy it served than its peers on Wall Street — betting that a small percentage of its start-up clients would reach high valuations and make up for all of the deals where it lost money.
Early-stage venture debt deals have declined sharply since SVB collapsed. Lenders have tightened their standards and start-ups with uncertain financial prospects have been unable to secure expensive loans in a rising interest rate environment.
SVB’s new parent, First Citizens, is the closest to providing the same specific brand of venture debt. Its revamped SVB website outlines a familiar commitment to “back the backers” and SVB will co-sponsor the 2024 ski trip alongside IBM Ventures and law firm Fenwick.
But SVB is a fraction of its pre-crisis size. Deposits have fallen to $38.5bn from a peak of about $189bn, and it has made just $1.8bn of venture debt commitments under its new owners’ control, compared to a loan book of $6.7bn at the end of 2022.
“First Citizens understands that the SVB business was underwriting the underwriters,” said Lux Capital’s Hébert. “We still get the calls [from SVB] making sure we stand behind some of these companies, but it feels like there has been a tightening . . . standards have increased.”
One of the ways in which the market has changed is that it is now widely accepted practice for young companies to keep accounts at two or three banks.
That has been a boon for rival banks and fintech platforms such as Mercury and Brex, which have scooped up billions of dollars of deposits. But it has complicated life for founders. “Before the collapse we could see that most companies had most of their funds with SVB. That has completely changed in the last year,” said Camilla Matias Morais, chief operating officer at Brex, whose deposits have surged from $3bn to $7bn since SVB collapsed. “Brex definitely took advantage of that but . . . managing more relationships is just way more work.”
The old SVB’s lending terms typically required start-ups to hold all of their cash at the bank, meaning many were unable to fund their operations or payroll during SVB’s meltdown last year.
“It was draconian and meant people had very few options when SVB started to look shaky,” said an executive at one large start-up. That has changed under its new owners: the executive said a recent term sheet from SVB for a $50mn credit facility required his company to keep “at least” 50 per cent of its cash at the bank.
Still, when SVB failed, it was because of poor balance sheet management by its top executives rather than the risk appetite of its relationship bankers. The three big banks gunning for start-ups’ business have happily taken on its staff.
Wall Street giant JPMorgan acquired SVB rival First Republic last May and embarked on a hiring spree of commercial bankers catering to the start-up sector, including SVB rainmakers John China and Ashraf Hebela.
HSBC snapped up SVB’s UK business for £1, then launched a unit aimed at serving US start-ups by hiring 40 SVB bankers, including its top technology banker for North America, David Sabow. First Citizens is suing HSBC for $1bn over the hires, which it claimed was a scheme to strip a competitor of top clients and confidential information.
Stifel poached a trio of senior bankers from SVB, led by its head of tech corporate banking Chris Stedman, and has since hired 50 bankers to service start-ups and entrepreneurs.
“We really are going after everything we used to do at SVB,” said Jake Moseley, who co-heads Stifel’s venture banking practice with Stedman and who previously spent two decades working as a tech banker at SVB.
“We have an opportunity to create the next big venture bank . . . this is not about fixing some fundamental issue that existed within [SVB’s] venture banking practice,” he added.
But despite lofty ambitions, the numbers are still relatively small for the big banks. HSBC Innovation Bank, launched in June, had deposits of $6bn and loans of $8bn by year-end. At Stifel, deposits from venture clients have grown from $500mn to $3bn in the past year, and it has made $1.3bn of loan commitments to venture-backed companies in that time.
Part of the appeal of international banking giants to former SVB depositors was their relative stability, strong governance and controls. But their mammoth bureaucracies have made it difficult to act with the speed and nimbleness needed to service fast-growing early-stage start-up companies, according to founders and venture capitalists.
“SVB knew their client segment really well,” said the chief financial officer of a $1bn software start-up. “You can send these bankers to other banks, but they will still run into the internal processes.”
They have also refrained from copying the riskier loans to start-ups and sweet mortgage deals to the ultra-wealthy that made SVB the go-to bank for tech entrepreneurs. The big banks have instead defaulted to providing services to mostly late-stage start-ups — a more predictable and less risky part of the venture economy.
JPMorgan has prioritised relationships with venture capitalists that back start-ups, according to interviews with several investors who use the bank, and on growth companies likely to deliver M&A and initial public offering fees in future. The Wall Street bank has also been increasing its provision of banking services to the entire start-up ecosystem.
The tech executive with the $50mn credit facility said HSBC’s pitch included a covenant that required the company’s annual growth rate to remain above 25 per cent.
“It was really tough in a time of purposefully slowing down growth to drive profitability, but they wouldn’t back down on it,” the executive said.
The $1bn software start-up moved its funds to HSBC during the run on SVB. It is now moving its primary banking operations again, to JPMorgan. “They’re a big bureaucratic bank,” the company’s CFO said of HSBC. “It’s hard for them to reinvent themselves.”
For some venture capitalists, the flight to safety post-SVB will remain the cornerstone of the market, despite big banks’ flaws.
Hébert said: “The experience from entrepreneurs is the [big banks] are not as responsive, the apps suck, but our first principle is making sure if you have money in your account, you can access it.”
“The first responsibility [for a bank] is do not lose our money or end up in a gigantic bankruptcy, so for me anything other than that is gravy.”
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