Fintech and technology startups are still on the way after the closure of SVB

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 start-ups, such as venture debt, corporate banking and asset management. But it also provided industry expertise and a network.

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

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

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

“They’ve 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 biggest winner in this business.”

Works with SVB

UNest held all of 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 in major banks,” Yudina said.

But in order to receive venture debt, Silicon Valley Bank required customers to transfer all their money to it.

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

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

“Let’s say we raised a Series A in the middle of a pandemic, so we weren’t able to raise as much equity,” Yudina said. “We knew 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 expand our runway. It’s like an insurance instrument for startups.”

Strolling after SVB’s fall

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

“We were able to get a large portion of the money out on Thursday,” Yudina said. “It definitely gave me and the entire management team peace of mind over the weekend that we could meet pay. I know a lot of founders weren’t as lucky.”

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

“The whole 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 Monday.

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

Akkaraju realized that Silicon Valley Bank was in trouble in January, when he looked at the call report it provided 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 a profit, which didn’t happen,” he said.

Bond.ai is now spreading its money to several banks.

Compt, a Boston-based human resources technology startup, was a client of Silicon Valley Bank until four years ago, when it moved to First Republic due to changes in 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,” recalled Amy Spurling, founder and CEO of Compt. When important questions arose about salary and bank transfers, calling a nameless, faceless representative at a contact center didn’t work for her.

Now that she uses First Republic, “I sat with my bank all weekend,” Spurling said. “They have been incredible, which is the way SVB operated. So when I lost it, I said no. This is not for me.”

First Republic’s stock has fallen about 50% since the Silicon Valley Bank’s demise, but Spurling isn’t worried about that.

“The whole banking sector took a hit today,” she said in an interview on Monday. “Companies like Charles Schwab took a hit. I don’t think there’s the same run on deposits at First Republic as there was on Friday at Silicon Valley Bank. That doesn’t mean you shouldn’t diversify and have more banks in your cash management strategy, but I’m not worried about the 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’m still very interested in what this meant for the tech world in general,” she said.

She also worries that the closure of the bank was not 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 race. And that makes me angry because there were players with interesting conflicts of interest that made the bank run happen. Look at the people who said, take your money out, but were invested in competing products. It are some very serious conflicts of interest that I think deserve more scrutiny.”

What now

UNest has fallen back on the secondary account they held at First Republic Bank.

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

This is because they are too big to fail, so there is no doubt that depositors will be made whole.

Spurling also expects some tech startups to go to the big four banks, for the same reason, and this could be difficult 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-on-one personal. It’s not as comfortable with the way startups operate. I think lines of credit are going to be a lot more difficult for startups to move forward, and maybe that has to happen. I think it’s going to be some adjustments.”

Yudina and Spurling both believe that from now on it will be difficult for banks to require startups to keep all their money with them.

“I think there’s going to be a zero-tolerance policy with VCs for that going forward, even if they had supported it originally,” Spurling said. “I think there’s going to be a lot more pressure to diversify.” When Compt was a Silicon Valley Bank customer, it was required to keep all of its money in the bank, even though it had no subprime debt.

“It was just, if you want to work with us, you have to have all the 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 they knew there was cash there. They were trying to hedge the risk, but that also meant you were therefore not diversified.”

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

“There’s no one to give them venture debt, and venture capitalists won’t even finance at all,” Akkaraju said. “That’s what I worry about. I answered probably 220 calls over the weekend from companies that are growing like crazy but have no profits or net income to show for it and they’re looking for investment and they’re dead.”

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

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

Spurling agrees that this will continue to be a difficult period for technology startups

“For people who need a round of funding, it’s going to be a lot more difficult,” 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 run a technology business.”

For start-up CFOs, diversifying bank accounts will be key.

“Cash management and cash planning is going to become even more critical,” said Spurling, a former CFO himself. “We’ve gone through a pretty long period of growth at all costs, which a lot of VCs have been big advocates for. But if the underlying unit economics aren’t there, it’s a pretty risky endeavor because you don’t know when it’s going to be a massive market shift. So I think we’re coming back to some basic economic core factors.”