Fintech and tech startups still reeling from SVB shutdown

Where do tech startups go now that Silicon Valley Bank is gone?

The Santa Clara firm wasn’t just a lender to the fintech industry. It offered financial services tailored to the needs of startups, such as venture debt, corporate banking and asset management. But it also provided industry expertise and a network.

“I respected them a lot,” said Ksenia Yudina, founder and CEO of the fintech UNest and a Silicon Valley Bank customer, in an interview. “They definitely were a huge supporter of my company and made a lot of connections at the early stage. They introduced us to VCs and they were going above and beyond.”

SVB was important to Uday Akkaraju, chairman and CEO of Bond.ai, when his company was starting out. The bank helped Bond.ai open its first accounts and provided resources on how to navigate the financial system. 

“If you ask any tech company, I think they will say the same, that Silicon Valley Bank touched them in some way,” said Akkaraju in an interview Monday. About 19 banks and 29 employers offer his company’s AI-based software to consumers to help them improve their financial health. 

“They have been a massive supporter — as a lender, as a community builder, as a limited partner in funds,” said Jay Reinemann, general partner at Propel Venture Partners. “There are competitors to them, but they were the far winner in this industry.” 

Working with SVB

UNest had all its operating accounts at Silicon Valley Bank, not by choice.

“Of course it’s prudent for a company to have multiple accounts and when we started, we had three accounts at major banks,” Yudina said. 

But to receive venture debt, Silicon Valley Bank required customers to transfer all of their cash to it. 

“Not just cash, but all operating funds, including all credit cards,” Yudina explained. “We were forced to close other credit cards. Thankfully we kept one other account; that helped us to get some money out on Thursday. But that’s why so many founders are exposed right now. It’s not for lack of prudence. It’s not because we are naive and we don’t know that we need to diversify. It’s actually an industry requirement for venture debt that requires you to put all your money into a single provider.” 

Silicon Valley Bank was the largest provider of venture debt. The product, which acts like a working line of capital, was appealing to fintechs like UNest because it was non-dilutive – fintechs could access cash without giving away equity in their company. 

“Let’s say we were raising a Series A in the middle of a pandemic, so we were not able to get that much equity capital,” Yudina said. “We knew that we didn’t have to use the debt if we didn’t require it. If we needed it, we could draw on it and that helped to extend our runway. It’s like an insurance instrument for startups.” 

Reeling from SVB’s fall

On Thursday, Yudina began receiving messages from venture capital firms that were concerned about SVB. 

“We were able to get a big portion of the money out on Thursday,” Yudina said. “That definitely gave me and the entire executive team peace of mind over the weekend that we could meet payroll. I know that a lot of founders were not as fortunate.”

When she wasn’t monitoring the news, she spent a lot of time corresponding with colleagues at other fintechs over WhatsApp.

“The entire industry came together,” Yudina said. “Everyone was so supportive, exchanging useful contacts, making introductions, sharing tips and best practices, because everyone was preparing for the worst,” she said on Monday.

Asked how crazy her weekend was, Yudina said, “I can’t call it a weekend. I’ve never experienced anything like that. No one in the tech industry has. I spoke with our CMO, who has been in the industry for 25 years, and he said this was the most dramatic experience that he’s ever had. Everyone was on their phones and just trying to figure out next steps.” 

Akkaraju realized Silicon Valley Bank was having problems in January, when he looked at the call report it filed in December, and pulled some money out of the bank then.

“We were also hoping that they would be able to sell some of their assets and make money, which did not happen,” he said. 

Bond.ai is now spreading its money around to multiple banks.

Compt, a Boston-based human resources tech startup, was a customer of Silicon Valley Bank up until four years ago, when it moved to First Republic due to changes to the way SVB handled the relationship.

“Instead of having a personal banker who was my go-to person, they moved me to a 1-800 number,” Amy Spurling, founder and CEO of Compt, recalled. When important questions came up about payroll and wire transfers, calling a nameless, faceless rep at a contact center didn’t work for her.

Now that she uses First Republic, “I was texting with my banker all weekend,” Spurling said. “They’ve been incredible, which is the way SVB used to operate. And so when I lost that, I said, nope. This is not for me.”

First Republic’s stock has dropped about 50% since Silicon Valley Bank’s demise, but Spurling is not worried about it.

“The entire banking sector took a hit today,” she said in an interview Monday. “Companies like Charles Schwab took a hit. I don’t think there’s the same run on deposits on First Republic that there was on Friday at Silicon Valley Bank. That doesn’t mean that you shouldn’t diversify and have multiple banks in your cash management strategy, but I’m not concerned about First Republic.” 

Spurling’s initial reaction to SVB’s demise was concern for the ecosystem, she said.

Even though she was no longer a customer, “I am still very much concerned overall for what this meant for the tech world in general,” she said. 

She also worries that the closing of the bank wasn’t based on its core financials.

“There were very big problems on their balance sheet and they had taken a lot of risk,” Spurling said. “But the ultimate failure was a Twitter run. And that angers me because there were players with interesting conflicts of interest making that bank run happen. Look at the ones who said, take your money out, but were invested in competing products. There is some very serious conflict of interest that I think merits more scrutiny.” 

What now

UNest has fallen back on the secondary account it kept at First Republic Bank. 

“I’m optimistic and hopeful given the message that they received traditional funding from JP Morgan and the bank looks stable, that they’re going to be okay,” Yudina said. “I personally believe that the biggest beneficiary of this whole situation is going to be the four largest banks. Everyone I’m speaking with is in the process of opening an account at one of the big four.” 

This is because they are too big to fail, so there’s no question depositors will be made whole.

Spurling also expects some tech startups will go to the four largest banks, for the same reason, and this may be hard for some founders.

“Their approach to banking is very different from a Silicon Valley bank or even a First Republic Bank,” she said. “It’s not as one-to-one personal. It’s not as comfortable with the way startups operate. I think lines of credit are going to be a lot harder for startups to get going forward, and maybe that needs to happen. I think there are going to be some adjustments.”

Yudina and Spurling both think that from here on, it’s going to be hard for banks to demand that startups keep all their money with them.

“I think there’s going to be a zero tolerance policy with VCs for that going forward, even though they had supported that originally,” Spurling said. “I think there’s going to be a much bigger push to diversify.” When Compt was a Silicon Valley Bank customer, it was required to keep all its money at the bank, even though it did not have venture debt.

“It was just, if you want to work with us, you have to have all of your funding in SVB,” she said. 

But she also understands why the bank had this requirement. “When you look at offering a startup or a technology company a line of credit, we don’t have the same type of assets that a real estate company would have as collateral,” she said. “So they wanted your cash in the bank so that they knew for sure there’s cash there. They were trying to hedge their risk, but it also meant that you were therefore not diversified.”

Hardest hit by the Silicon Valley Bank mess going forward will be the tech companies that are growing and profitable but require funding, because the investment ecosystem is dry, Akkaraju said.

“There is nobody to give them venture debt and venture capitalists will not even fund at all,” Akkaraju said. “That is what my concern is. I answered probably 220 calls over the weekend from companies that are growing like crazy, but do not have profit or net income to show, and they’re looking for investment and they’re dead.” 

SVB handled about half of all venture debt. “That’ll take a big hit, especially now because there will be so many companies now struggling to get that from someone else,” Akkaraju said. 

Loan sharks and VCs will swarm in to fill this void, he believes, and provide funding at low valuations. What’s needed is an entity willing to fund high-growth startups at a future valuation.

Spurling agrees this will continue to be a rough period for tech startups

“For folks who need a round of funding, it’s going to be a lot harder,” she said. “The hurdles are going to be higher to be able to get venture checks. It’s going to be harder to start and to run a technology business.” 

For startup chief financial officers, diversifying bank accounts will be key.

“Cash management and cash planning is going to be even more critical,” said Spurling, a former CFO herself. “We’ve gone through a pretty long period of growth at all costs, which a lot of VCs have been huge proponents of. But if the underlying unit economics aren’t there, that’s a pretty risky endeavor because you don’t know when there’s going to be a massive market shift. And so I think we’re going to get back to some core financial fundamentals.”