It is often difficult to explain why Silicon Valley Bank, which does business with about half of all venture-backed startups in the U.S., was the bank of choice for many. It was only the 16th-largest financial institution in the country, but easily the largest piece of infrastructure for the startup ecosystem.
Companies in the life sciences and health care space relied heavily on SVB, with about 12% of the bank’s $173 billion in deposits belonging to companies in that sector.
That’s because Silicon Valley Bank didn’t operate like traditional banks — it matched the fast-paced startup network by being fast and nimble itself. It swiftly supplied startups with loans during periods of high growth. It took on companies that were so novel and innovative they didn’t have traditional product market fit. Traditional banks were more risk-averse and didn’t understand emerging tech the way SVB did.
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With the loss of SVB, investors worry the startup innovation system may have to slow down to meet its new, slower lenders.
“I think lenders will be more conservative in their banking approach with clients, especially ones that are in emerging tech, biotech and life sciences,” said David Crean, a biotech investor and managing general partner at Cardiff Advisory.
When COVID hit, SVB moved fast
In 2020, when California issued a stay-at-home order to everyone except essential workers as a result of the pandemic, the private sector took action.
Medtech companies quickly pivoted to meet the surge in demand for testing. Some popped up testing sites on city curbs while others developed easy-to-use scheduling apps. Other companies helped physicians bring their practice into the telehealth age.
Companies in the life sciences moved in to fill gaps in creating therapeutics, vaccine support products and real-time diagnostics.
“Those companies expanded,” said Matt Ocko, co-managing partner at DCVC. “In the middle of the pandemic, SVB moved to support these companies at lightning speed in a way that larger institutions simply could not.”
By contrast, traditional banks moved more slowly, taking longer to approve loans for startups. They turned away young founders who didn’t have a robust credit history. U.S. immigrants, who weren’t citizens, would have a much harder time banking their company at the larger firms.
“I think it’s difficult for people to remember how unbelievably conservative mainstream banking was,” Ocko said.
Biggest losers: emerging technologies
SVB was also a safe haven for startups that were so novel, they didn’t meet traditional risk assessments that bigger banks used.
Big banks have a fiduciary responsibility to be conservative about their investments. Many nascent companies, especially in their infancy, don’t have product market fit as a result of being so new. This was especially crucial for companies in niche and risky industries like biotech, which often take 10 years or more before ever turning a profit.
“They were good at lending in one form or another to two startups pursuing what, to the rest of the world including big banks, would be very arcane, difficult to understand technology,” Ocko said of SVB.
This is how SVB became the bank of choice for the startup world. With decades of expertise in the tech industry, SVB was better able to understand the risks of these companies. When Naveen Jain founded the gut microbiome and at-home diagnostics startup Viome in 2016, he chose SVB as his sole bank at the behest of his investors.
“In the early days of SVB, they were willing to grant the startup companies that were not profitable,” Jain said. “Most traditional banks would only give you a loan when you had assets, or you had profit, whereas SVB was willing to give loans to companies that they thought [were viable].”
Without it, it may become harder for startups in emerging markets to grow.
“I think there may be an impact on innovation as many companies will have a harder time getting financing, and as a result [may] have to declare insolvency due to a lack of capital,” said Crean. “Overall, investors will be even more cautious about the sector.”
A drag on innovation
Without SVB, many companies are migrating towards traditional banks.
It’s hard to tell, materially, how this will impact innovation in the tech sector. SVB quickly provided loans to startups that won defense contracts, or startups that signed partnerships with other companies. SVB quickly allowed companies to open research and development labs, start a manufacturing facility for a new product, or start new projects.
Since other banks move more slowly, companies may have to forgo contract offers if they can’t get a loan. That will quickly impact when a company will be able to raise its next round of funding, and how much it will get.
Overall, SVB’s demise could force Silicon Valley to adjust to a new normal — one that is slower-paced, matched with that of most banks.
“One of the knock-on effects of SVB not being around as an institution is all of that accumulated expertise lived in the people of SVB,” Ocko said. “There aren’t binders that a giant bank inherits that tell you step-by-step how to support a radical lifesaving biotech company.”
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Illustration: Dom Guzman
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