What Silicon Valley Bank Did Right
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Summary.
There’s a reason Silicon Valley Bank became such a fixture among startups: it understood their needs better than any other bank. Even now, many banks don’t have the flexibility and understanding to make banking easy for startups. With SVB gone, a lot of young companies will find it harder to manage their finances.
In the wake of the current wave of bank failures, one of the startups I currently work with — a Silicon Valley Bank (SVB) customer — recently applied to open an account with a major money center bank. The bank came back with a long list of objections and ultimately declined to open even a basic banking account. Reasons given were: the startup was not 100% U.S. owned, had a foreign-born CEO, and had a senior manager residing outside the U.S. The startup was denied even though it is very well capitalized with a CEO residing in the U.S., has many large U.S. customers, and has a very promising future.
This headache speaks to the great value SVB delivered over the last 40 years for startups, venture capitalists, private equity firms, publicly listed tech companies and the overall economy.
I first learned about SVB while at my first startup, Avid Technology (AVID), in 1990. I collected a very large check from a customer and volunteered to deliver the check to the bank to get the cash on the books — always a priority in a startup. I learned from our CFO that SVB had no local offices, so we mailed the check to the bank. I thought it was interesting that a bank would have no branches and yet could provide the services we needed as a fast-growing company. We banked with SVB because it understood a company like ours better than any other bank could.
Over the next 30-plus years, SVB evolved along with the startup and venture capital industries. It took time to understand a startup’s business and recognized that startups evolve and change as they grow. I remember our CFO demonstrating Avid’s revolutionary digital video editing software to SVB when we were expanding our account. They wanted to better understand our technology and products and be a partner in our entrepreneurial journey. Other banks did not make the effort to try to understand our business. They had strict financial requirements of all kinds for opening accounts and would not alter their rules. And this despite Avid being backed by blue chip investors Greylock and Highland Capital.
Most banks lend to companies when there is proof of revenue. By contrast, SVB understood that startups don’t always have their businesses fully figured out when they first raise capital. Startups often raise money before they have achieved what in industry parlance is called “product-market fit” — being in a good market with a product that can satisfy customers. It takes time and experimentation to achieve product-market fit and SVB patiently supported startups in this journey including by banking startups before they had revenue.
Because SVB were experts in understanding this startup evolution, they were much better partners than traditional banks. SVB was more lenient in allowing variations from specific revenue covenants that are often part of banking relationships. From their inception, they offered ideas for investment banking relationships, potential customers, and even executives who could join our company. This was a full-service bank focused on startups.
SVB was also ahead of its time as pioneer in branchless and remote banking. They pioneered many useful business-to-business internet and mobile banking features. Another founder I work with recently mentioned how easy SVB made it to deposit even very large customer checks on their mobile banking app. SVB was also early in accepting innovations like DocuSign and other electronic signing technologies while traditional banks required paper documents and “wet” signatures. They also were early in providing startups a variety of debt financing options after equity funding rounds. This enabled those startups to extend their cash runways without founders and employees giving up as much equity.
As the startup market went global, more and more promising startups were located and founded outside the U.S. SVB recognized this trend early. Founders from Israel, France, Holland, China and other countries know how important yet difficult it is to enter the U.S. market. SVB made banking in the U.S. easy for foreign founders.
SVB also leaned heavily into the growing venture capital investors who backed startups. By partnering with venture capitalists who would back their startups on their successive funding rounds the bank reduced their deposit and venture debt risk. And SVB did this and had loan losses comparable to traditional banks, yet without traditional collateral requirements of major banks. This “magic triangle” of startups, VCs, and SVB created a symbiotic relationship and worked beautifully for 40 years, helping launch tech bellwethers like Cisco, Etsy, and Roku.
Over time other banks focused on lending to the startup market, but none were able to fully match SVB’s offerings.
What made SVB unique was not what caused them to fail. The huge influx of deposits from startups during the recent tech bubble posed an investment challenge for SVB as it would for any bank. SVB mismanaged its investments, which led to a run on the bank and ultimately it’s closure and Chapter 11 filing.
Its demise will have a negative impact on the tech ecosystem as they no longer have a focused banking partner that understands a startup’s unique needs. The startup I mentioned that struggled to open a banking account with a major bank is already experiencing the fallout.