The Climb and Crash of SVB

AUTHOR: Bridget Whitlow

If I had a dollar for every time the words “meltdown, failure, disaster, or chaos” have crossed my inbox since March 10th, I would have … a receivership certificate. Described by Garry Tan of Y Combinator as an *extinction-level event,* the impacts of SVB’s downturn will undoubtedly reverberate through the VC world (and our inboxes) for a long time to come.

‍As a fairly recent grad who’s still learning the ropes of the VC industry, I had a massive lingering question upon hearing of the bank’s failure. I had read about what led to the bank’s demise and how the situation was unfolding – but what I really wanted to know was:

‍How did SVB become that crucial to the VC space?

‍I mean, it was the primary bank of almost 50% of US tech and life-sciences start-ups, holding over $209B as of the end of 2022. How did it become so well-trusted?

‍The answer, I found, was multifaceted.

‍Firstly, the bank was literally built for VCs. Founders Bill Biggerstaff and Robert Mederis left Bank of America in the early 80s because they saw that traditional banks didn’t fully comprehend the nature of start-ups. Where big banks saw inherent risk, SVB saw opportunity.

‍Big banks typically have a standardized approach to lending. They charge higher rates or require extensive collateral, such as a high percentage of company shares, for loans with higher credit risk, often leaving start-ups with unfavorable terms. In contrast, SVB saw the opportunity to customize loans to be more forgiving towards start-ups that took time to generate revenue. SVB offered services that bigger banks steered clear of: venture debt financing, cash management for funds, and lines of credit to aid in expediting deals. Thus, the bank created a genesis system to set early-stage companies up for success.

‍SVB’s reputation grew quickly, as its entrepreneurial nature resonated with many clients who were themselves innovators. Seriously, the concept of the bank was formulated over a game of poker for crying out loud — it was something straight out of a VC’s dream. Quickly, the bank grew a track record of working with early-stage companies and it even became commonplace for venture capital firms to include a requirement in their term sheets that start-ups had to open an account with SVB.

‍Thanks to network effects, SVB established a broad community of tech entrepreneurs, investors, and industry players. Leveraging its extensive network of venture capital, law, and accounting firms, the bank connected its clients with essential resources while offering personalized attention through knowledgeable relationship managers. This network proved invaluable to clients, contributing to the bank’s stickiness.

‍The sudden collapse of a bank so vital to the US start-up ecosystem has systematic implications. Experts in the VC sphere anticipate that the bank’s failure could make the future availability and accessibility of venture debt scarce.

‍Early-stage start-ups that do not have a consistent income stream may face significant challenges when trying to secure debt financing through alternative means. In contrast, established companies that are in their later stages face a distinct set of problems: these companies need to borrow large sums of money, making aggregate interest payments even more expensive. Furthermore, the private credit market, which is a significant player in financing debt for more established companies, is also subject to market volatility, creating additional obstacles.

‍The death of a bank that has been so integral to start-up culture for nearly 40 years is therefore a symbolic one. SVB was a bank that put the little guys first, while still maintaining the scale and efficiency that big banks boast about. The death of SVB is not only a great financial loss, but an emotional one too. The consequences of this collapse are expected to change the nature of the venture market, and the industry will likely have to adapt to a new reality.

‍Herein lies the opportunity: those who can afford to step up, take risks, and continue to play the game will contribute to the survival of this robust and dynamic ecosystem we call venture capital. Someone will have to fill the shoes left by SVB, but it’s unclear how long that will take and how effective they will be in doing so. Either we find an alternative solution, or we will see corporations and conglomerates continue to eat up market share. As the industry adapts to this new reality, it’s important to remain vigilant and be prepared for potential challenges ahead.

‍Review reliable sources and platforms if you need advisory to assess the legal impact of the SVB current situation.