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Wednesday, February 21, 2024
Feb. 21, 2024

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‘A huge disruption’: Startups worldwide gird for life after SVB

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Quang Hoang, the co-founder of a startup called Birdly Inc., spent his Monday refreshing the website of Silicon Valley Bank every hour. His San Francisco-based mentoring startup had about $10 million deposited with the now-failed financial institution, patronized by a large portion of the country’s most promising tech companies. But as afternoon turned to evening, he still hadn’t been able to recover his cash.

Hoang was one of thousands of founders globally trying to track down their money this week after days of chaos, and who are completely rethinking the way they bank. Startups from Silicon Valley to London, Tel Aviv and tech hubs across Africa depended on SVB as a one-stop shop for everything from holding their fortunes to personal mortgages. Now they face a financial reckoning. Many investors and tech firms believe that the future will be significantly more difficult, even if the bank continues to solicit deposits under its new name.

Deals ranging from venture debt financing to funding rounds are likely to be impacted by recent days’ upheaval. As startups grapple with the logistics of moving money around and opening accounts at new banks, general partner at Race Capital Edith Yeung believes that transactions will likely be delayed or even scrapped amid the bedlam.

“I’m sure there were deals made last week that are now not going to happen,” Yeung said. “This is a huge disruption to the venture space.”

Many in the tech industry this week are mourning the undoing of SVB, and lamenting the future difficulty of working with banks unfamiliar with the unique needs of young tech companies. Sequoia Capital’s Mike Moritz compared its failure to a “death in the family” in a column on Sunday. Yeung said VCs are going to have to ask more questions of their banks and may have to try more traditional options.

She also advised that going forward, VCs shouldn’t simply rely on word-of-mouth when picking a bank: “We chose this bank on reputation and reputation is not enough.”

David Pakman, managing partner at crypto VC firm CoinFund, said that tech firms and venture capitalists are still reeling from this weekend’s events, despite the government backstop. For startups, SVB distinguished itself by making allowances for the volatile nature of their businesses. “You’re not going to get that from a Big Three bank,” he said.

In Israel, where SVB had an outsized presence in the country’s booming tech sector, companies are bracing for delays while setting up accounts at other lenders, according to Avi Eyal, a managing partner at Entree Capital. “It may be a long time before things get back to normal, and international companies are going to be at the end of the line,” he said.

SVB’s UK clients face less disruption after HSBC Holdings Plc scooped up its local unit for a symbolic price of £1, but they will have to get used to a culture shift. HSBC is the country’s largest bank and has a conservative reputation, while SVB catered to freewheeling young companies in tech, life sciences and crypto.

For U.S. venture firms, the path forward may be simpler. “VCs don’t have trouble getting bank accounts,” Pakman said.

Many startups plan to move their money to a large institution, where they’re guaranteed it will be safe, even if they don’t get hyper-personalized service or particularly high interest rates. Several founders have said they’ll do business in the future with Bank of America and JPMorgan. Deposit insurance is also a priority, and some startups plan to put their money in accounts at multiple banks in order to stay below the $250,000 Federal Deposit Insurance Corp. insurance threshold. Healy Jones, vice president of financial strategy at Kruze Consulting, said clients are increasingly looking for options that allow them to get several million insured by the FDIC.

“People want FDIC coverage all of a sudden,” Jones said. “Nobody cared about it five days ago, but now everybody wants it.”

The global fallout may be felt even in places where SVB didn’t have a large presence. While SVB only had relationships with a limited number of companies in Africa, startups there are still indirectly exposed, according to Samuel Sul, director of the financing group at Renaissance Capital in London.

“If U.S. tech and VCs sneeze, African tech companies catch a cold,” Sul said. “There will be less liquidity in the system.”

SVB’s failure was also a wake-up call that some CEOs need to learn a new role: money manager. When seed-stage firm NFX met with its portfolio companies on Monday, half the questions were around money management, said Pete Flint, an NFX general partner. Not only were CEOs concerned about how to protect money, but they also wanted to learn how they could take advantage of the high interest rate environment to get meaningful returns, he said. He’s been recommending founders make sure they have more than one bank account.

“This is a new skill that founders and CEOs have not had to learn in the last eight years,” Flint said. “Everyone’s trying to figure out the right risk-reward profile.”

Some nontraditional financial companies have seized the moment to step up their own loan offerings. Startups like Arc Technologies Inc., Tranch Inc. and Brex Inc. have offered cash-strapped startups financing. And Brex said it has seen record business.

Hoang, the co-founder of Birdly, which does business as Plato, said he will use large banks in addition to Brex going forward. Right now, his Brex account has sufficient funds to cover immediate expenses at his 25-person startup for a month or so, Hoang said.

Before the crash, many advisers had “told us that Brex is fine, but we needed a real bank — one that was stable like SVB,” Hoang said. “That’s the ironic part.”

After a stressful weekend of worst-case scenario planning that included the prospect of layoffs, Hoang was relieved by the government’s decision late Sunday to guarantee deposits. “I believe in this country and I trust the system,” said Hoang. Around 7 p.m. San Francisco time, he got his money back.

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