March 2023
Eric Rosenfeld
The SVB Bank Run ’23 did turn out to be a fundraiser of sorts, thanks to the FDIC’s gallant run to the rescue. A third of OVF’s portfolio companies banked with SVB, and some may continue to do so. Whether the iconic Silicon Valley Bank lives on as a reincarnation of its former self, or is sold in whole or a la carte, our venture community in Oregon and Southern Washington will mourn the loss of what was a specialized and important contributor to our regional startup economy. Here’s our view of the profound near-term impacts of the SVB Bank Run ’23.
--------------
Cracks in our financial system are like cracks in a snow field. On the surface everything looks normal. The sun plus the weight of snow melts water under the surface – but you can’t see it. You can’t tell which part of a snow field might move first. But it happens in a second. Before an avalanche, the sun may be shining and everything looks beautiful. Then there’s a sound like a gunshot, where the ice cracks. And the whole lot instantly falls into the valley, consuming everything in its path. Early March 9, that was the case with SVB when widely followed investor Jason Calacanis tweeted, “YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW!”
The collapse of SVB could impact Oregon startups and growth companies, and their investors, in several profound and lasting ways:
· People & Community – SVB regional leaders like Portland managing director Jane Ullman actively advise local startups regarding their financing, cash management, and credit options, as well as connect founders with potential investors and advisors. Fortunately, Jane continues in her role with SVB and, without hardly missing a beat, is back at work championing and serving the needs of local startups and growth companies, regardless of whether they are current or prospective SVB clients. If our venture community ever lost “SVB Jane,” we’d be noticeably worse off.
· A Dearth of Venture Debt – SVB was the primary provider of venture debt in Oregon and nationally, with $6.7 billion of high-interest, unsecured loans outstanding when it collapsed. These are risky loans that conventional banks won’t make and can’t make. They are also the loans that fuel our most innovative startups that are endeavoring to solve some of the world’s most pressing problems, including in areas ranging from healthcare to education, to climate change and clean energy. Expect such loans to now be rarer and more expensive, especially for the earliest of startups and youngest of founders.
· Community Banks – SVB isn’t the only bank holding longer-duration securities that have declined in value as interest rates have climbed. According to Stanford professor Amit Seru, the market value of assets held by banks, on average, is about 9% lower than the reported book value. Community and regional banks that cater to affluent clients, like First Republic, likely have a higher percentage of uninsured depositors who could pose a flight risk with the faintest of Twitter tweets. PacWest Bancorp shares are down 60% since March 9.
· More Regulations – For better or worse, mid-size banks that serve our region, like Columbia/Umpqua, will likely be subject to stricter capital and liquidity requirements. This may help these mid-tier banks weather a recession, but this could also further reduce their ability and appetite to make loans to startups and growth companies. Startups are often the first to be frozen out of credit opportunities when banking regulations tighten, including startups developing solutions to mitigate climate change or to cure a horrible disease.
· Non-profits – Many non-profit organizations were among the tens of thousands of clients that banked at SVB. SVB was known as a reliable lender for affordable housing projects and community economic development organizations. In 2021, SVB committed to spend over $11 billion on programs nationwide targeting underserved communities through 2026.
· Proliferation of Bank Accounts – This past week, nearly every startup scrambled to open accounts at a large national bank, for perceived safety, and additional accounts at other banks as backups, just in case. Some even opened backup accounts to their backup accounts. Since deposits are insured up to only $250K per tax ID per bank, many startups and VCs are also rushing to insured sweep accounts that, in turn, spread deposits in <$250K increments across multiple other banks. The result: a proliferation of bank accounts at a scale that would make even a Wells Fargo banker blush.
SVB clients were, by and large, a unique and mostly unbankable demographic. Clients came with ambitious dreams, impressive resumes and references, and often no tangible assets and an age too young to have earned FICO scores in the green. Many fail. A few succeed wildly. SVB developed the expertise to evaluate and price the unique risks associated with lending to startups, at least we thought. The opportunity to replace SVB in Oregon, and nationally, and lend against the $300+ billion in VC “dry powder” is huge. Whether it’s SVB 2.0, or someone else, it could take a while. Once burned, twice shy, and for good reason.
Thirteen of OVF’s 35 active portfolio companies enjoyed a banking or lending relationship with SVB. Fortunately, all have access to their funds, are able to make payroll, and continue to serve their customers. While the rest of the venture industry is in contraction mode, OVF has a record $20M to invest this year in our region’s top startups. We are eager to meet with founders and do what we can to fill the financing void and help them achieve their dreams.
