Berlin, Dusseldorf, Frankfurt, New York, San Francisco The Silicon Valley Bank (SVB) and the start-up scene – for a long time it was a symbiosis. “The SVB was the gold standard,” says investor Bernhard Gold, venture partner at venture capital funder Relay Ventures. In the past he advised start-ups to keep their accounts with the SVB. The bank has always been a good partner for the start-up landscape in the USA.
Gold isn’t the only financier who recommended the start-up financier from Santa Clara, California, to young companies. Several Silicon Valley start-ups report to the Handelsblatt that investors pushed them to open accounts with the SVB in the early stages. As a rule, this condition was not part of the written agreement surrounding an investment, but was clearly communicated.
The SVB was also a house bank and natural ally for many venture capital financiers themselves. “The SVB has geared itself more than any other established commercial bank to business with venture capital-financed technology companies for decades,” says Fabian Heilemann, founder and CEO of venture capitalist Aenu.
But now the damage is great. Last week the SVB collapsed, sparking fresh fears of a banking crisis. US President Joe Biden went public earlier this week and promised to protect all deposits in US banks.
The SVB’s crisis had been triggered by huge withdrawals of funds, which forced the institution to sell low-yield bonds at high losses, ultimately leading to its collapse. This feeds the fear of loan defaults in the banking sector – but also gets many start-ups into trouble.
Because the close ties between the start-up scene and the SVB have contributed, at least in the USA, to the fact that many young tech companies and their financiers are now so dependent on the US government putting together a rescue package for SVB customers. Just four percent of all customer deposits at the bank are protected by the American deposit insurance.
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Was the start-up scene too naive? The collapse of the SVB has sparked a discussion in the industry about its own mistakes and the lessons to be learned from them. “Start-ups have to be customers of several banks,” David Sacks, partner at Craft Ventures, clarified this week on the US stock exchange broadcaster CNBC. That is also clearly the message to his portfolio companies.
The majority of the financial resources must also be held at one of the major banks, which are classified as systemically important and are therefore regulated particularly strictly. These include JP Morgan Chase, Bank of America, Citigroup and Wells Fargo.
Traditional bank instead of neobank with a cool app
The debate about the right consequences is also taking place in Germany. The dependency on the SVB in Europe has never been as pronounced as in the USA. “The SVB bankruptcy was less relevant for German start-ups because very few had their main account there – it was very different in the USA and Great Britain,” says Filip Dames, founder of Cherry Ventures.
According to their own statements, many German billion-euro start-ups have no business relationship with Silicon Valley Bank.
(Photo: dpa)
In a survey by the Handelsblatt among the 36 German unicorns, i.e. the start-ups that are valued at more than one billion dollars by investors, a third stated that they had no contact with the SVB. For example, there were no business relationships with billion-euro start-ups such as N26, Volocopter, Forto, Enpal, Flix, Trade Republic, Flink, Solaris, Omio and Grover – neither in Germany nor with the US parent or British subsidiary.
However, the majority of unicorns did not answer the request. Start-ups such as Personio, Celonis and Mambu had either deposits or lines of credit, but also relied on other banks in addition to the SVB. At no time was there any risk to our business or operations, Personio said.
Cases in which investors literally forced their start-ups to have an account with the SVB are not known in the German start-up and investor scene. There are even cases where things are completely different. The head of a 60-employee company in Berlin says his investors forced him to be more cautious.
“In all likelihood, we, the tech community, got off with a fright,” Berlin early-stage investor Christoph Janz posted on LinkedIn this week. It will take time to digest the lessons learned, “but what I really blame myself for is not telling founders to spread their cash across different banks.”
Investor: “I should have known better”
If an inexperienced founder doesn’t think about something like that, that’s fine. “But I should have known better,” writes Janz. Investors like him would spend “an enormous amount of time” talking to founders about topics such as the burn rate, i.e. the monthly costs, runway, i.e. the time that a start-up has at a certain burn rate until bankruptcy, or talk about financing. “But how safe is our money, I never asked that, and I don’t recall a question like that from any other venture capitalist.”
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Sebastian Becker from Redalpine sees it similarly: “In the board meetings of start-ups, bank relationships have rarely been an issue. In the future, venture capitalists will pay more attention to which and how many banks startups have their accounts with and that they will not automatically go to places where interest rates are 0.5 percent better,” he says.
As intensely as the scene is now concerned with the question of the right bank details, it is just as intensely concerned with the question of what role venture capitalists played in the rapid collapse of the tech scene’s long-standing house bank. There are many indications that the investor scene has at least accelerated the end of the SVB.
This is how investors triggered a mass exodus
Because there are rumors that important tech investors like Sequoia or Peter Thiel’s Founders Fund recommend their start-ups to withdraw their money from the SVB, which eventually triggers a mass exodus from the bank. “We hear about a bank run at Silicon Valley Bank. If you have an account there, we advise you to withdraw all the money as soon as possible,” says a message from the start-up financier to the companies in which Global Founders Capital (GFC) is involved and the Handelsblatt present.
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When other US banks got into trouble after the SVB left, GFC sent recommendations to more than 200 recipients to withdraw their money from digital banks and institutions specializing in the tech sector. GFC names some financial institutions by name, including Signature Bank, which has now also been closed. Instead, the founders are now said to park their assets with “large, traditional banks such as JP Morgan, Citibank, Bank of America, Morgan Stanley, Wells Fargo”.
As a result of the collapse of Silicon Valley Bank, customers have withdrawn deposits from Signature Bank on a large scale.
(Photo: IMAGO/Xinhua)
GFC was probably neither the first nor the only investor to send such messages to its portfolio companies, i.e. the start-ups in which it invested, in the past few days. The mass exodus of customers torpedoed SVB’s efforts to find investors for a saving capital increase. The day after the bank made its capital requirements public, the US deposit insurance company takes over and closes the institution in the middle of the day, which rarely happens.
Investors likely played an important role in SVB’s crisis, said investor Kristofer “Kriffy” Perez, an advisor at the Future-Today Institute and co-founder of Global PayTech Ventures. “The VCs form a tight-knit community that looks closely at what other players in the industry are doing,” Perez said. In times of crisis like the one at SVB, initial uncertainties would probably have led to investors calling on their portfolio companies at an early stage to reduce their dependence on SVB as much as possible.
Start-up scene holds investors responsible
The scene sees the responsibility primarily with the investors who got the wave going. “If Sequoia and the Founders Fund really initiated this, I see the responsibility with them,” says the head of a large German start-up. “If they had dealt with the issue differently and said: Hey Silicon Valley Bank, let’s talk, you transfer 50 percent or give certain guarantees, then it could have been avoided completely.”
In his view, the investors who would have reacted to this first wave had no other choice. “When everyone’s withdrawing their money, you can’t wait. You also have a responsibility to your companies and your investors,” he says. Investors called him at night. “And that’s right.”
But despite all the criticism of too much dependency, the start-up scene has not broken with the Silicon Valley Bank itself. “We stand by Silicon Valley Bank,” said investor Bernhard Gold, venture partner at Relay Ventures. The bank has always been a good partner for the start-up landscape in the USA.
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