Start-ups and founders have learned an important lesson in counterparty risk following the collapse of Silicon Valley Bank (SVB) on Friday. As they withdraw their deposits this week and open new accounts with more traditional banks, the prospect of a new lending entity emerging to fill the gap left by SVB is also taking shape.
- Vulnerable start-ups rethink banking in wake of SVB fallout
- JP Morgan, Wells Fargo, Bank of America see billions of dollars in transfers
- Providing loans to risky start-ups may be better suited to private capital
By Colin Leopold
Head of Research & Insight, Private Equity Wire
Start-ups and founders have learned an important lesson in counterparty risk following the collapse of Silicon Valley Bank (SVB) on Friday.
As they withdraw their deposits this week and open new accounts with more traditional banks, the prospect of a new lending entity emerging to fill the gap left by SVB is also taking shape.
Forty-year-old SVB was a major lender to venture capital-backed start-ups, providing liquidity they often couldn’t access from traditional lenders. But according to reports this week citing SEC filings, the bank also pushed exclusivity clauses onto some of these clients, blocking their ability to bank elsewhere. This left many start-ups wholly exposed to the bank’s failure. “A lot of concentration in one bank in a highly connected community clearly turned out to be a very bad thing,” one biotech founder told the FT.
Operating across different banks can be challenging for start-ups, as they typically need access to cash quickly and rely more on trust and knowledge of their industry for loans. Over the past year, financing challenges have increased: start-ups have faced a major downturn resulting in redundancies and down rounds in equity funding, crushing their valuation. Last year investments in start-ups worldwide sank by a third while valuations of private start-ups tumbled by more than 50%. Venture debt, as provided by SVB, can allow start-ups to avoid an equity down-round and retain ownership.
It’s unclear how much more support start-ups will receive from those circling the remains of SVB.
This week, start-ups in the US turned to the larger banks there to open deposit accounts. JP Morgan and Wells Fargo are among a small group with specialist teams in Silicon Valley. Along with Citigroup and Bank of America, they have been flooded with transfer requests worth tens of billions of dollars and, according to reports, they are trying to speed up the approval process for new start-up clients where possible.
In the UK, HSBC has taken over SVB’s UK business. One UK-based venture capital partner speaking to Private Equity Wire said buying over 3,000 clients for £1 “sounded like a great deal”. While the move fits with HSBC’s push into high-growth industries such as life sciences and tech and follows a new venture capital strategy launched by HSBC’s asset management arm in 2021, these 3,300 customers account for less than 5% of Britain’s start-ups.
In the longer-term, providing loans to risky start-ups may be better suited to private capital. In an investment committee meeting held on 13 March reported by Buyouts Insider, the CIO of US pension fund CalPERS said in reference to the SVB situation that it could be “a strategic partner and agile in providing solutions for balance sheet restructuring or a provider of patient, long-term capital”. VC funds will need to become agile and strategic too, as they support their start-ups in the weeks and months to come.
Private equity funds including Apollo, Blackstone, Ares Management, KKR and Carlyle have also been reported as showing interest in SVB’s $74bn loan book. Rather than taking on the role of start-up lender, they could take some of these loans into their credit portfolios, or – in the case of Apollo – work with some of the larger VC firms to revive part of the bank’s client-facing operations. The VC firms involved in this plan are reported to include General Catalyst, Andreessen Horowitz and Khosla Ventures.
The demise of SVB may also usher in a whole new banking practice entirely for start-ups. The UK-based VC says there is now an “exciting and long debate coming around government centralised digital wallets and how banks separate custody and services” following SVB. But, by limiting the banks’ access to capital, he adds: “the biggest people against that will be larger banks themselves”.