To put it mildly, the meteoric collapse of Silicon Valley Bank has been a historic time of confusion for everyone the startup ecosystem touches. VCs are wringing their hands (or not) over how they can help their portfolio companies; startup founders and CEOs are running about trying their very best to plan for the foreseeable future; and vendors and partners are either helping those affected or asking for reassurances that they’ll be paid or serviced properly.
Maëlle Gavet, CEO of Techstars, vividly describes what things have been like behind the scenes: “It’s been unbelievably intense from Thursday until when the Federal Reserve finally made an announcement saying that deposits were going to be guaranteed. It’s been both for Techstars as an operating company, and for the 3,500 portfolio companies we have. A portion of them were banking with SVB, either exclusively or partially. We had so many concerns. How would we pay employees and honor our bills? How do we make sure that the company survives the next week and then the next month and then the next six months? So, ‘intense’ — that’s the word I would use to describe the experience.”
While many founders and VCs have shared similar experiences as they try to navigate this confusion, the future ahead is even hazier. The general consensus seems to be that SVB’s collapse may have far-reaching consequences for venture capital, startups and the entire financial sector in the U.S.
But what will those consequences be? To better understand how investors are thinking about this, we spoke to a few investors affected by the collapse and asked them about the long-term implications, how cash management is set to change, who’s been hurting the most and who will come away with a golden opportunity.
We surveyed:
- Maëlle Gavet, CEO, Techstars
- Niko Bonatsos, managing director, General Catalyst
- Colin Beirne, partner, Two Sigma Ventures
Maëlle Gavet, CEO, Techstars
What are some of the unseen or longer-term consequences of the recent banking crisis?
There will be a shift away from what I call middle banking. It used to be that startups would bank with SVB or with other banks that are not the top four. Now there’s going to be this divergence toward having one bank account with a big bank and then trying experiments with others. There’s going to be an extreme shift in general in the financial industry when it comes to financing startups.
I also expect more regulation for the VC and startup world. Six months ago, when valuations started crashing, the world and D.C. were looking at it. Yes, valuations are going down, but it just impacts all these LPs that invested, so it’s basically back to normal.
D.C. didn’t really care about what was happening there. I think, in this case, they’re going to care about how the tech world operates because they’ve suddenly found themselves caught off guard over the weekend. The overall financing system in the United States is going to explode because of one bank in Silicon Valley. I would expect more regulation to happen.
Every time there is a negative incident, the tech ecosystem tries to reinvent itself and often falls back to its old habits. If SVB is not there anymore, how do you create financing for a startup? You need to think about fundraising in a different way. Maybe you need to back different companies.
We’re probably going to see consolidation in the VC class. It was already on the way, but this is probably going to accelerate it, because SVB was also a preeminent provider of loans for GPs to make their capital commitment calls.
That is at play here as well. So I would expect the VC industry to consolidate and restructure quite a bit.
How has your advice changed regarding portfolio company cash management in a post-SVB world?
For the last four days, all of us have been focused on making sure that our portfolio companies are able to make payroll next week. The reality is that, in the medium to long term (medium being a month from now), there is this question of the line of credit. All these companies depend on a line of credit that, let’s face it, the rest of the traditional financial industry has refused to give to startups.
I don’t have the answer. I’m just saying there is a problem: We’ve built a system in which you have to get bigger, raise more money, leverage as much as you possibly can and not focus too much on profitability. We’ve created an engine that requires all these lines of financing, but we didn’t create the banking infrastructure to allow that to happen, and SVB made a huge business out of it. But that’s about it.
So now that SVB’s future is uncertain, I think the next big question we’re going to have is, what does that mean? Do we change the way tech startups are managing their cash and fundraising? Or is there a new type of financial institution that it’s going to come in and fill the role that SVB was playing? It’s going to be survival of the fittest.
Who stands to benefit the most from this? Who will suffer the most?
I’m going to state the obvious: The ones suffering the most — besides the shareholders and bondholders of SVB — are the startups. Unfortunately, I think it’s going to continue to be so because of all the financing problems we just talked about. I think having access to SVB accounts will solve the payroll problem, but it’s still going to be an uphill battle to figure out next steps in that new world.
I think the first ones who are going to be impacted or continue to be impacted are the startups, and the second ones that are not benefiting from it are the VCs. Which is quite interesting, because, to a large extent, the VCs are the ones who created that run on the bank. They’re going to suffer from that run on the bank. Some of them in the short term, but most of them in the long term.
As for who stands to benefit from that: the fintech world. The big banks, for sure. I don’t think they’re going to publish any of their numbers anytime soon, but I would suspect that the top three, four banks, which are fully backed by the government, suddenly had a lot more money on Monday than they had last Thursday.
Also benefiting from this would be the fintech companies that are going to be innovating and have a good asset base. I think these companies have an amazing opportunity right now to gain market share by being very innovative.
Niko Bonatsos, managing director, General Catalyst
What are some of the unseen or longer-term consequences of the recent banking crisis?
A loss of trust in the venture capital ecosystem can increase the gap that exists between the tech sector and the federal government. There is a risk that these events may bring more regulations that become more restrictive to building innovative companies, which would be a huge loss to the nation as a whole.
How has your approach to banking your fund changed in the wake of the SVB crisis?
We are encouraging companies to diversify where they do their banking to make sure they can withstand challenges and ensure business continuity. For example, out of three banking partners, perhaps one is a big bank and the rest can be smaller banks that understand how to effectively work with startups.
Who stands to benefit the most from this? Who will suffer the most?
Big banks stand to benefit. Startups with or in search of venture debt will suffer the most, because it will likely get more expensive. Very early-stage founders who are getting started as we speak will benefit the most, as everyone else is distracted with all this stuff.
Colin Beirne, partner, Two Sigma Ventures
What are some of the unseen or longer-term consequences of the recent banking crisis?
With lower availability of debt for startups, the demand for equity investment will go up, which will continue the downward adjustment of VC round valuations that’s been underway for the last year. Especially at later-stage companies that rely more on debt as part of their balance sheet, there may be further need to do more cost reductions, accelerating the dynamics of the cycle we’re in.
Who stands to benefit the most from this? Who will suffer the most?
Large balance sheet banks should fare well as depositors prioritize safety of assets over particular banking product features or personalized relationships. Over time, banks will hopefully recognize the value of continued innovation and see an opportunity in lending and providing services to ambitious, growing startups.
The biggest success stories will be banks that get both things right: safety and product offerings.
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