There’s a reason Silicon Valley Bank has become a fixture among startups: it understands their needs better than any other bank. Even today, many banks do not have the flexibility and understanding to facilitate banking for beginners. With SVB gone, many young companies will struggle to manage their finances.
In the wake of the current wave of bank failures, one of the startups I’m currently working with – a customer of Silicon Valley Bank (SVB) – recently applied to open an account in a major money center bank. The bank came back with a long list of objections and finally refused to open even a basic banking account. The reasons given were: the startup is not 100% US-owned, has a foreign-born CEO, and has a senior manager who lives outside the US The startup was rejected even though it was very good capital of a CEO who lives in the US, has many large customers in the US, and has a very good future.
This headache speaks to the enormous value that SVB has provided over the past 40 years for startups, venture capitalists, private equity firms, publicly listed tech companies and the general economy.
I first learned about SVB while at my first startup, Avid Technology (AVID), in 1990. I collected a very large check from a customer and volunteered to deliver the check to the bank to collect the money on the books — always a startup’s priority. I learned from our CFO that SVB does not have a local office, so we sent the check to the bank. I thought it was interesting that a bank had no branches and yet could provide the services we needed as a fast growing company. We bank with SVB because it understands a company like ours better than any other bank can.
Over the next 30-plus years, SVB evolved alongside the startup and venture capital industries. It takes time to understand the business of a startup and know that startups evolve and change as they grow. I remember our CFO showing Avid’s revolutionary digital video editing software to SVB when we expanded our account. They want to better understand our technology and products and be a partner in our business journey. Other banks don’t bother trying to understand our business. They have strict financial requirements for all types of account opening and will not change their rules. And this despite Avid being backed by blue chip investors Greylock and Highland Capital.
Most banks lend to companies with proof of income. On the contrary, SVB understands that startups do not always fully understand their businesses when they first raise capital. Startups often raise money before they achieve what industry parlance calls “product-market fit” — being in a good market with a product that satisfies customers. It takes time and experimentation to achieve product-market fit and SVB patiently supports startups on this journey including banking startups before they have revenue.
Because SVB are experts in understanding this startup evolution, they are better partners than traditional banks. SVB is more sympathetic in allowing deviations from specific revenue covenants that are often part of banking relationships. From their inception, they offer ideas for investment banking relationships, potential customers, and even executives who may join our company. It is a full-service bank focused on startups.
SVB was also ahead of its time as a pioneer of branchless and remote banking. They pioneered many useful business-to-business internet and mobile banking features. Another founder I worked with recently mentioned how easy SVB makes it to deposit even large customer checks on their mobile banking app. SVB is also an early adopter of innovations such as DocuSign and other electronic signature technologies while traditional banks require paper documents and “wet” signatures. They are also early in providing startups with various debt investment options after equity funding rounds. This enables startups to expand their cash runways without founders and employees providing much equity.
As the startup market becomes global, more and more promising startups located and founded outside the US SVB recognized this trend early. Founders from Israel, France, Holland, China and other countries know how important but difficult it is to enter the US market. SVB makes banking in the US easier for foreign founders.
SVB also relies heavily on the growing number of venture capital investors who back startups. By partnering with venture capitalists who will support their startups in their successive rounds of funding, the bank reduces their deposit and venture debt risk. And SVB did this and had loan losses comparable to traditional banks, but without the traditional collateral requirements of the big banks. This “magic triangle” of startups, VCs, and SVB created a symbiotic relationship and worked beautifully for 40 years, helping launch tech bellwethers like Cisco, Etsy, and Roku.
Over time other banks have focused on lending to the startup market, but none have fully matched SVB’s offerings.
What makes SVB unique is not the reason they fail. The huge influx of deposits from startups during the recent tech bubble posed an investment challenge for SVB like any other bank. SVB mismanaged its investments, which led to the bank’s run and ultimately its closure and Chapter 11 filing.
Its demise will have a negative impact on the tech ecosystem as they will no longer have a focused banking partner that understands the unique needs of a startup. The startup I mentioned that struggled to open a banking account at a major bank has already experienced a setback.