Technology start-ups are scrambling to deal with tighter regulation and the influence of larger banks that are set to replace the informal financial relationships and close personal connections that have characterised Silicon Valley Bank’s dealings with the sector.
Young tech companies, which account for a large part of SVB’s deposits, were making plans to take cash out of the bank this week, despite moves late on Sunday to protect depositors and keep at least some of its operations going. HSBC agreed to take over the bank’s UK arm and regulators in Washington were making a renewed effort to find a buyer for the US operations.
As entrepreneurs assessed the damage caused to the tech scene by the collapse of SVB over recent days, a first step was a rush to move cash and avoid being reliant on a single bank again.
“A lot of concentration in one bank in a highly connected community clearly turned out to be a very bad thing,” said Laksh Aithani, founder of UK-based biotech company Charm Therapeutics, which had all of its £50mn in cash tied up with the bank. “We want to analyse all of our different risks in terms of Treasury policy and mitigate against that.”
Lauren Schulte Wang, founder of sustainable period care start-up The Flex Company, said her company had opened an account at JPMorgan over the weekend when its accounts at SVB were frozen, and planned to add further to its banking relationships.
“We will diversify,” she said. “But operating across multiple banks is going to make things slightly more difficult. Start-ups use cash to reinvest in the business, it isn’t money sitting idle in a bank account.”
SVB is credited by many founders and venture capitalists with being more willing to lend to start-ups than larger banks. The close banking relationships that had underpinned those loans are likely to be scarcer in future.
“Very few of these loans get done without SVB calling up their venture investors to hear their perspective on the business,” one UK-based VC said. “The ecosystem does have to rely on a certain amount of trust given the early and fragile nature of the business.”
“SVB has been willing to lend to venture-backed start-ups because of their belief that the VCs won’t leave them holding the bag,” a VC in San Francisco added. That trust had broken down late last week as some venture investors urged companies they had funded to pull their cash from the bank, precipitating its collapse, this investor said.
As well as being one of the few banks to lend to start-ups with little in the way of revenue or assets, investors and founders said that SVB had also been unusual in gearing many of its activities to the start-up world, from its marketing efforts to the design of its services.
SVB courted founders more assiduously than larger institutions, attending accelerator programmes and pitching themselves as a one-stop shop, according to Sam Franklin, chief executive and co-founder of tech recruitment company Otta. “‘We know tech, this is going to be easy with us’, that was the pitch,” he said.
The bank had also expanded outside the US in recent years, making it straightforward for European founders to open accounts in the UK and for British entrepreneurs to do so in the US.
“It’s harder to open a bank account [in the UK] if you’re not British, and roughly half of tech founders in the UK aren’t British,” said John Spindler, chief executive of UK-focused accelerator Capital Enterprise.
SVB designed its services to fit the needs of a new start-up, for instance guiding them through setting up the financial infrastructure needed to operate a business, providing an unusually high level of personal service for relatively small customers.
“There was always somebody you could speak to, no matter how small [the start-up],” said Robin Klein, a VC investor at LocalGlobe. “That’s very different from the big banks.”
Banks such as Wells Fargo and JPMorgan have their own specialist teams of bankers in Silicon Valley to work with start-ups and could fill some of the gaps left by the collapse of SVB. However, several investors said their services did not match a bank that had spent 40 years honing a business model geared to start-ups.
Over time, the loss of a supportive institution is likely to make life harder for start-ups and tilt technology markets further in favour of bigger platform companies with strong balance sheets, one veteran tech investor said.
In a sign that traditional banks may be less welcoming, some start-ups struggled to open new accounts with them late last week. “There was a surprisingly large number of nos,” one VC investor said.
Many venture capital firms are now providing more active support for their portfolio companies on how to manage and invest their funds. One investor said he was advising portfolio companies to balance reserves between traditional lenders including HSBC in the UK and digital-only “neobanks” that provide fast access to capital.
These moves represent the beginning of a new era for tech start-ups, as they are forced to deal with the loss of a singular institution that had sought to provide for all their financing needs.
Punit Singh Soni, founder and chief executive of Suki, an artificial intelligence company based near San Francisco that had all its accounts frozen when the bank collapsed, said: “Unfortunately, I do think there will be some things that are lost in this, and it will be the fabric of how Silicon Valley has been.”