How will 2023 be remembered in the tech world?
- A) As the year that 3,200 startups and over $27 billion in venture funding turned to dust
- B) As the year that saw LPs shrink away from the asset class
- C) As the year of the country’s biggest bank collapse since 2008
The 72-hour run on Silicon Valley Bank and subsequent crisis only calmed when the FDIC stepped in to ensure customer cash. And the stress of those few days compelled many founders and VCs to realize for the first time why treasury management actually matters.
But other than that, has anything really changed? Here’s a look at what some investors predicted in March, and where we are now that the dust has settled.
Prediction No. 1: The glory days of SVB’s special treatment of startups are over.
SVB wasn’t just known as the bank throwing lavish parties and sponsoring bigwig conferences for Silicon Valley elite: To many early-stage founders, it provided an opportunity to get favorable terms on credit and loans that a big bank would laugh at.
For founders of VC-backed businesses that are still pre-revenue, “Good luck getting a mortgage now,” said Healy Jones, VP of financial strategy at Kruze Consulting, an accounting firm that serves over 800 venture-backed startups.
Venture debt has also become harder to secure, but not just because of SVB. Higher interest rates have dulled the appeal of startup debt, and less investment activity has decreased the need for debt that would typically accompany a new round.
Plus, for some small VCs, setting up capital call lines with a big bank is a tougher ask than it was with First Republic Bank, a popular choice of banking partner for many Sand Hill Road firms. Some VCs have been saying, “We really shot ourselves in the foot letting First Republic go down,” according to Jones. “They offered all these capital call lines and credit that other banks don’t want to do because they’re actually not necessarily great lines of business per se,” he added.
In a nutshell, at bigger banks, there are more hoops to jump through for a narrower product suite than during the glory days of SVB and First Republic.
Prediction No. 2: Startups will finally take treasury management seriously.
The biggest shift in the status quo, founders and investors say, is that there is significantly more diversification of treasury management.
“Diversity in banking is pretty important now, and is talked about at the board level by most companies,” according to Tamara Steffens, managing director at Thomson Reuters Ventures who previously led Microsoft‘s venture investing.
The standard for many startups now is to keep at least two payroll cycles in a separate account to avoid the payroll crunch that happened when SVB was in a spiral. “Ten years ago when I was working with early-stage founders, they really didn’t get that involved in [treasury management] and now they’re very actively involved in it,” said Ashraf Hebela, who left SVB shortly after the crisis to head up startup banking at JP Morgan Chase.
For many mid- and late-stage companies, the crisis just accelerated their inevitable move to a big bank like JP Morgan. Treasury management at Boston Metal, a renewable steel startup valued at $860 million, now involves more diversification as well as a bigger bank. “It looks very different pre and post-[SVB],” said Adam Rauwerdink, senior vice president of business development at Boston Metal. The startup previously banked with Silicon Valley Bank, a popular choice among climate-tech startups.
Some 60% of new startups are opening Chase accounts as soon as they’re founded, according to data from Kruze Consulting. But JP Morgan isn’t the only provider out there.
Prediction No. 3: The nimble neo-banks will win out.
The fintech startups that provided same-day cash transfers during the SVB bank run have also won out this year. Brex, a credit card and cash management company valued at $12.3 billion, absorbed some $3 billion in new customer cash post-SVB, while Mercury logged roughly 25,700 new customers from March to June.
Brex isn’t primarily a cash management startup, but the penetration of its checking account service among its existing customer base has gone up 10 percentage points post-SVB, COO Michael Tannenbaum told PitchBook. “The main reason why people choose Brex is that it’s all-in-one. We have a credit card that everybody wants in startup land and we have a bank account that people want,” Tannenbaum said.
For early-stage startups with fairly simple banking needs, Brex and Mercury are sufficient, even if they’ll still have to make the eventual migration to a big bank when they’re securing nine-figure raises or making connections to an investment bank over IPO plans. Ninety days after SVB caused many to flee to Mercury, around 95% of net new customers were still using Mercury, according to founder Immad Akhund.
And it’s also become much more popular for founders to use both companies: 50% of the latest Y Combinator cohort opened an account with Mercury and 80% of that same cohort has opened an account with Brex, according to the two companies. And post-First Republic, some micro-VCs—investors with less than $20 million in AUM—have joined Mercury to bank.
Prediction No. 4: Silicon Valley Bank under First Citizens will lose its reputation, its best talent, and founders will abandon it for good.
Nearly as soon as the bank run got underway, larger banks were maneuvering to capture Silicon Valley Bank’s market share in the innovation economy.
In the succeeding months, HSBC, Stifel, Moelis & Co., and JP Morgan all snapped up huge numbers of top-tier staffers from Silicon Valley Bank, from the head of technology and healthcare banking David Sabow to president of SVB Capital John China.
HSBC hired so many SVBers that First Citizens filed a lawsuit alleging a scheme to steal trade secrets from Silicon Valley Bank. HSBC has denied poaching staffers.
Still, many founders have stuck with SVB: some in order to keep their attractive loan terms, others because they like its specialist startup focus. “People had relationships with their person and they felt comfortable enough staying around, which speaks volumes about the people on the ground at SVB,” said Jennifer Audeh, co-chair of Foley Hoag‘s business department, whose clients include VC firms and private companies.
Between March and August, some 1,500 SVB customers had made fresh deposits in the bank.
“[SVB] has the brand name and it’s a name people recognize—and people have short memories,” Audeh added.