The fall of Silicon Valley Bank (SVB) dealt an immediate shock to the global startup ecosystem and will have lasting ramifications for banks and founders. Many startups lack access to large banks, and instead rely on community and regional banks to meet their needs. SVB in particular was uniquely situated to support the startup ecosystem, offering more favorable terms for loans and connections for founders. But the fall of SVB has led to concerns that other banks may suffer similar fates, and at the same time has brought to the forefront the risk inherent to the startup ecosystem. While a divided Congress means legislation is unlikely, banks could face additional regulatory burdens that would have a larger impact on smaller banks, and founders may confront more risk aversion as they seek to access capital. The journey of a startup is already precarious on any given day—the collapse of a mainstay bank for the startup ecosystem will only make building a startup more challenging.
What happened at SVB?
While the SVB collapse largely unfolded over 48 hours, the circumstances that lead to the bank being placed into receivership go back months. Silicon Valley Bank situated itself as the bank for the startup ecosystem, counting numerous venture capital firms and startups as clients. Pre-pandemic, as the startup ecosystem thrived, SVB similarly thrived. The bank's clients were flush with cash, and startups raised record amounts of venture capital. At the same time, interest rates hit historic lows and were expected to stay low, barring an unexpected surge in inflation. SVB decided to take advantage of low interest rates and park capital in longer-term bonds.
What was once an asset for SVB—clients with brimming bank accounts—soon became a liability, with the majority of the deposits exceeding the $250,000 limit for Federal Deposit Insurance Corporation (FDIC) insurance. As interest rates rose and inflation crept up, the value of the long-term bonds plummeted. With liabilities in excess of its assets and depositors looking for higher returns, SVB was forced to sell bonds at a loss and was unable to raise the cash needed to remain afloat. Chatter swiftly swirled amongst VCs and throughout the startup ecosystem about whether companies should pull their deposits, creating a run on the bank and leading to its collapse. Many depositors, including startups, often have deposits in their accounts that exceed FDIC insurance limits—when early-stage startups need on average $55,000 to operate per month, it is simply impractical for many startups to split all of their funds amongst multiple banks so that all funds are insured, without creating a headache for operating activities. Even for those companies with insurance through other mechanisms, like cash sweep accounts, companies faced fears they couldn’t swiftly access their money.
Other factors likely also contributed—the Trump administration raised the threshold designating banks as systemically important from $50 billion to $250 billion, freeing up many smaller and regional banks from annual stress tests and certain capitalization requirements. And SVB was without a chief risk officer for much of 2022. And some blame the speed of the bank’s collapse on conversations on social media, arguing they accelerated the run.
What did SVB mean to the startup ecosystem?
From its outset, Silicon Valley Bank positioned itself as a mainstay bank for the startup ecosystem, courting founders and venture capitalists. SVB developed extensive relationships with startup companies, providing services like lines of credit and loans to companies that weren’t yet profitable and would have a difficult time accessing services at other banks. Even in the wake of the collapse, startups have sung praises of working with SVB—Ham Serunjogi of Chipper stated, “when I was trying to open Chipper’s first bank account, SVB was the only bank that would accept us.” Some startups used SVB for all of their banking services in exchange for SVB lines of credit.
Other startups chose to bank with SVB because the bank knew the startup ecosystem. Joshe Ordonez of Airpals banks with SVB because “they are the ones that understand our situation.” She explained that as a founder she is already taking a lot of risks, and SVB provided credit cards for her startup that wouldn’t impact her personal finances. . It was also important that they waived fees, whereas the large banks charge for everything, including minimum balance requirements, which can be particularly hard to meet as an early-stage founder. Joshe also pointed to the fact that SVB allowed clients to open accounts remotely using the EIN numbers from their companies, which was a benefit for immigrant founders and entrepreneurs overseas.
SVB was also a critical source of venture debt—a relatively short-term loan on favorable terms, usually in exchange for the right to purchase common stock of the company in the future at a predetermined price. Venture debt is often used by early-stage, venture-backed startups that might not have the extensive collateral needed to obtain a conventional loan. “Growth companies use Silicon Valley Bank and Signature Bank because of their Venture Debt product which allows a scaling company to receive a loan easier than a traditional bank.” Paul Foley of Colorado Startups told us.
SVB was founded in the epicenter of the U.S. startup ecosystem, it worked with startups across the country and across the globe. SVB had branches in over a dozen states and served up to almost half of our nation’s startups. While it’s easy to picture the wealthiest investors as depositors at SVB, startups of all sizes relied on the bank, as did angel investors, many of whom operated independently.
What about underrepresented founders?
SVB, like the entire startup ecosystem, had strides to make towards accessibility and equitability for everyone—venture capital firms, many of whom were SVB clients, themselves lack much-needed diversity—but it often served as a lifeline for underrepresented founders that were locked out of many funding streams. Steve Case called SVB “an important gateway for female founders, minority founders and entrepreneurs from corners of the country that don’t see a lot of venture capital.” As he explained, the bank would “take meetings with founders, learn about their plans and develop relationships that other banks would likely not take the time to nurture” which “opened doors for founders beyond the traditional profile.” And the bank operated programs, like Access to Innovation, which was geared toward helping underrepresented founders access needed funding.
Given the role the bank played in fostering relationships for underrepresented founders, for Black founders, at least, SVB worked to build trust and facilitate access, particularly in light of past discrimination against people of color in banking. SVB supported organizations across Black entrepreneurial ecosystems, including accelerators, and without a clear institution to step into its footsteps, Black founders may feel the bank’s absence acutely.
As many startups moved their deposits from SVB to larger “systemically important” banks, many Black founders didn’t have that option as they’ve had to rely on smaller financial institutions like community and regional banks that have worked to meet the needs of underrepresented communities.
What do regional and community banks mean for the startup ecosystem?
SVB’s collapse has also put a spotlight on small and mid-sized banks. Startups and small businesses seek out small community or regional banks for a number of reasons. Whereas large banks have more stringent requirements for issuing loans or lines of credit, smaller banks often foster more personal relationships with clients, making it easier for startups to get the banking services they need. They might be more willing to take on clients that large banks might find risky, and they’re often able to move faster than larger banks, which can be attractive to startups. They’re typically able to tailor their services to their clients, including by providing industry-specific guidance, and can help with network building. According to the Independent Community Bankers of America, “In stark contrast to the nation’s largest banks, community banks operate under an entirely different business model—one that’s based locally and is relationship focused. As small businesses themselves, local community banks take pride in serving the unique needs of their customers and communities..”
The ripple effects from the collapse already are, and will continue to affect smaller banks, including minority-owned institutions, which have already declined in number over the years. Some banks are already seeing customers move their deposits to larger banks, even though many small banks, like minority-owned banks, have minimal risky investments.
What happens next?
Even though the federal government has stepped in to guarantee all deposits—insured or not—at Silicon Valley Bank, the impact of the collapse will continue to affect the startup ecosystem and the U.S. banking system.
For banks, the aftermath of the collapse could result in community and regional banks losing clients in favor of larger banks. The flow of deposits to large banks at the expense of smaller institutions would reduce competition in banking, which would leave fewer options for startups to meet their banking needs. Policymakers could also pursue increased regulation of the U.S. banking system, including subjecting more banks to stress tests, which would require more resources that would disproportionately impact smaller banks.
For startups, the predominant concern has moved on from making payroll and accessing SVB deposits, to longer-term concerns, like the future ability to raise capital as the risk profile associated with the startup ecosystem is in the spotlight. Andrew Prystai of Omaha, Nebraska-based startup Event Vesta told Engine, “it feels like we were already in winter…I don't see how this doesn't make it worse by increasing risk or fear and encouraging a flight of capital to safer assets.”
Others are concerned about what the loss of SVB itself means to the startup ecosystem overall, including who will step in as a leader in the provision of venture debt. Foley of Colorado Startups went on to explain, “without Silicon Valley Bank and Signature Bank, startups will have fewer options to receive venture debt, which accounts for a large portion of funding in the ecosystem, especially in the later rounds such as Series A and on.”
Underrepresented founders are rightly concerned about what the collapse means for their ability to access capital and for their own banking relationships. Ordonez, of Airpals, tweeted, “we are not ‘tech bros’... Although we are a minority in the industry, we make a significant impact on the economy of our local communities. Unfortunately, as a minority-owned business, we are also among the most vulnerable to the potential ripple effects of a banking crisis.” And another founder told us they were concerned about the potential fallout—“We have concerns that funding for underrepresented founders will decline as ‘risk tolerance’ decreases among funders. Not because funding minority founders is risky (it's not), but because people tend to revert to old patterns in times of crisis, and old patterns were not diverse.”
Startup founders need security in the banking system—to perform operating tasks, access loans and lines of credit, and build relationships—and policy needs to support the banks that startups have to rely on. Policymakers stepped in quickly to insure SVB deposits, adding some much-needed stability to the banking system, but they must continue to act to support more banks, especially community and regional banks. Policymakers and investors should also take steps to ensure startup founders—especially underrepresented founders who have historically been excluded from venture capital opportunities and the banking system—have the resources they need to access diverse sources of funding and support as their companies grow.
