Easy Loans, Great Service: Why Silicon Valley Loved Silicon Valley Bank

When SVB nabbed a startup client, the bank often tried to grab all of its business, pressing borrowers to put all their deposits there, in part so the lender would have collateral for loans. The moves weren’t unique to SVB, but they helped to ingrain the bank more deeply in the venture world.

Mo Parikh, founder of software startup Bandwango, switched his company’s accounts over to SVB last year because his company wanted to get a line of credit and SVB’s terms were attractive. Bandwango took out a $1.5 million line of credit in exchange for doing all of its banking with SVB and giving the bank warrants.

“It was a really interesting arrangement,” Mr. Parikh said. “We didn’t really have to put anything up. We had to ensure that we were going to continue to keep our money with them.”

SVB’s tactics help explain not only the roots of its own crisis, but also the panic that swept through the startup world after its collapse. Because thousands of companies had significant cash with SVB, when they lost access to their accounts they had to rush to find ways to make payroll and pay other imminent bills until the federal government stepped in late Sunday to backstop all deposits at the bank.

Serial entrepreneur and angel investor Wayne Chang was a repeat client. In 2013, the bank offered to help him buy a house using stock he received when he sold his startup Crashlytics to then-privately held Twitter Inc. as collateral, because he didn’t have cash. A few years later, SVB gave him a mortgage in the “low 2%” range, significantly better than other banks, he said.

He said his subsequent startup, Digits, did its banking with SVB, putting three rounds of equity capital it raised totaling just under $100 million into the bank. SVB created an ecosystem, inviting founders to social events, including dinners for VCs and founders, poker nights and mixers, he said.

“These are future co-founders, partners, customers, investors in your company,” Mr. Chang said. “I never went to a Wachovia Bank founder mixer or Wells Fargo wine night. In a relationship-driven place like the startup community, that had real value.” 

Keeping things all in the family had its advantages: When a portfolio company was struggling to pay back a loan or needed an influx of cash, SVB would often find a way to accommodate it. 

Several years ago,

Marc Andreessen,

co-founder of venture-capital firm Andreessen Horowitz, which banked with SVB, called the bank on behalf of a startup that couldn’t repay a $10 million debt, The Wall Street Journal reported in 2015. The bank gave the startup six more months to pay back the loan, the Journal reported at the time.

The system seemed to work as intended for years, with Silicon Valley Bank working with some of the most well-known companies in the tech industry. Without it, some investors say, some of these companies wouldn’t have gotten off the ground. 

When the Federal Reserve began raising interest rates to fight inflation, startup capital dried up. Venture investment in U.S. startups fell by around a third in 2022, and new fundraising by venture-capital firms hit a nine-year low in the fourth quarter. 

Startups stopped replenishing their coffers, leading to a sudden reversal in deposit flows, prompting SVB to sell assets to meet customers’ liquidity needs. Rising rates also hammered the bank’s bond portfolio, which wasn’t hedged, so SVB had to sell assets at a steep loss. That behavior sparked fears about the bank’s solvency, leading to $42 billion in initiated withdrawals last Thursday, one of the largest bank runs in U.S. history.

Derek Brunelle, who worked at Silicon Valley Bank for more than a decade, said much of the long-term success of the bank was built on everybody being transparent and trusting one another to behave well in the sandbox. It was in SVB’s interest to be accommodating to portfolio companies because startup investors had dozens of other such companies that were clients of the bank as well, he said.

When an early stage biotech company that had a $5 million loan with the bank hit trouble in the trial phase of the drug it was developing, its investors decided to wind down the company, Mr. Brunelle said. “The VCs asked the bank to be patient,” he said. SVB agreed and later took a loss in the six figures. 

Within a year, the same management team of the biotech company started a new company, backed by some of the same investors. 

“The bank got the business,” Mr. Brunelle said. 

Over the course of four decades, its many relationships paid off. After the financial crisis, because of low interest rates, deposits flooded into the bank as investors poured into venture firms looking for better returns from tech companies.

Deposits skyrocketed in 2020, leaping 65%, and jumped an additional 85% in 2021. They peaked at $198 billion in early 2022, quadruple what the bank held in its vaults at the end of 2018. Fatefully it invested a large portion of the deposits in U.S. government debt at the peak of the bond market, and didn’t adequately hedge its risk. 

SVB was lenient when it came to underwriting loans, according to founders and investors, which allowed the bank to dominate the venture debt business and underwrite transactions that larger banks deemed too risky. It also drove business to its savings and money-market accounts—the loan sometimes included arrangements where the company agreed to park upward of 80% of its money with the bank, founders and investors said.

SVB also had an army of relationship managers that wooed their founder and investor clients with personal service, driving business.

Nicholas Donahue, founder of startup

Atmos,

would catch up with his relationship manager at SVB once every two months over Zoom. The manager would pitch him on opening more accounts, including money-market accounts that offered higher interest rates than the standard savings account he used, Mr. Donahue said.

Punit Soni said startup founders like himself don’t usually have time to think about diversifying bank accounts. They are pulling all-nighters trying to build their product or service, raise capital, hire new engineers or accomplish dozens of other tasks required to build their nascent business. 

He said it made sense to work with SVB because it provided fast service, and his company, Suki AI Inc., was able to borrow from SVB on terms that bigger banks wouldn’t have matched.

SVB was the kind of bank, he said, that would set up a wire transfer over a weekend so that it would get to a vendor first thing on Monday morning. 

Mr. Soni said he hopes the bank survives in some form so his startup can keep working with it. “They understood my business. I don’t think that people can appreciate what a big deal that is,” he said.

Write to Katherine Bindley at [email protected], Rolfe Winkler at [email protected] and Berber Jin at [email protected]

When SVB nabbed a startup client, the bank often tried to grab all of its business, pressing borrowers to put all their deposits there, in part so the lender would have collateral for loans. The moves weren’t unique to SVB, but they helped to ingrain the bank more deeply in the venture world.

Mo Parikh, founder of software startup Bandwango, switched his company’s accounts over to SVB last year because his company wanted to get a line of credit and SVB’s terms were attractive. Bandwango took out a $1.5 million line of credit in exchange for doing all of its banking with SVB and giving the bank warrants.

“It was a really interesting arrangement,” Mr. Parikh said. “We didn’t really have to put anything up. We had to ensure that we were going to continue to keep our money with them.”

SVB’s tactics help explain not only the roots of its own crisis, but also the panic that swept through the startup world after its collapse. Because thousands of companies had significant cash with SVB, when they lost access to their accounts they had to rush to find ways to make payroll and pay other imminent bills until the federal government stepped in late Sunday to backstop all deposits at the bank.

Serial entrepreneur and angel investor Wayne Chang was a repeat client. In 2013, the bank offered to help him buy a house using stock he received when he sold his startup Crashlytics to then-privately held Twitter Inc. as collateral, because he didn’t have cash. A few years later, SVB gave him a mortgage in the “low 2%” range, significantly better than other banks, he said.

He said his subsequent startup, Digits, did its banking with SVB, putting three rounds of equity capital it raised totaling just under $100 million into the bank. SVB created an ecosystem, inviting founders to social events, including dinners for VCs and founders, poker nights and mixers, he said.

“These are future co-founders, partners, customers, investors in your company,” Mr. Chang said. “I never went to a Wachovia Bank founder mixer or Wells Fargo wine night. In a relationship-driven place like the startup community, that had real value.” 

Keeping things all in the family had its advantages: When a portfolio company was struggling to pay back a loan or needed an influx of cash, SVB would often find a way to accommodate it. 

Several years ago,

Marc Andreessen,

co-founder of venture-capital firm Andreessen Horowitz, which banked with SVB, called the bank on behalf of a startup that couldn’t repay a $10 million debt, The Wall Street Journal reported in 2015. The bank gave the startup six more months to pay back the loan, the Journal reported at the time.

The system seemed to work as intended for years, with Silicon Valley Bank working with some of the most well-known companies in the tech industry. Without it, some investors say, some of these companies wouldn’t have gotten off the ground. 

When the Federal Reserve began raising interest rates to fight inflation, startup capital dried up. Venture investment in U.S. startups fell by around a third in 2022, and new fundraising by venture-capital firms hit a nine-year low in the fourth quarter. 

Startups stopped replenishing their coffers, leading to a sudden reversal in deposit flows, prompting SVB to sell assets to meet customers’ liquidity needs. Rising rates also hammered the bank’s bond portfolio, which wasn’t hedged, so SVB had to sell assets at a steep loss. That behavior sparked fears about the bank’s solvency, leading to $42 billion in initiated withdrawals last Thursday, one of the largest bank runs in U.S. history.

Derek Brunelle, who worked at Silicon Valley Bank for more than a decade, said much of the long-term success of the bank was built on everybody being transparent and trusting one another to behave well in the sandbox. It was in SVB’s interest to be accommodating to portfolio companies because startup investors had dozens of other such companies that were clients of the bank as well, he said.

When an early stage biotech company that had a $5 million loan with the bank hit trouble in the trial phase of the drug it was developing, its investors decided to wind down the company, Mr. Brunelle said. “The VCs asked the bank to be patient,” he said. SVB agreed and later took a loss in the six figures. 

Within a year, the same management team of the biotech company started a new company, backed by some of the same investors. 

“The bank got the business,” Mr. Brunelle said. 

Over the course of four decades, its many relationships paid off. After the financial crisis, because of low interest rates, deposits flooded into the bank as investors poured into venture firms looking for better returns from tech companies.

Deposits skyrocketed in 2020, leaping 65%, and jumped an additional 85% in 2021. They peaked at $198 billion in early 2022, quadruple what the bank held in its vaults at the end of 2018. Fatefully it invested a large portion of the deposits in U.S. government debt at the peak of the bond market, and didn’t adequately hedge its risk. 

SVB was lenient when it came to underwriting loans, according to founders and investors, which allowed the bank to dominate the venture debt business and underwrite transactions that larger banks deemed too risky. It also drove business to its savings and money-market accounts—the loan sometimes included arrangements where the company agreed to park upward of 80% of its money with the bank, founders and investors said.

SVB also had an army of relationship managers that wooed their founder and investor clients with personal service, driving business.

Nicholas Donahue, founder of startup

Atmos,

would catch up with his relationship manager at SVB once every two months over Zoom. The manager would pitch him on opening more accounts, including money-market accounts that offered higher interest rates than the standard savings account he used, Mr. Donahue said.

Punit Soni said startup founders like himself don’t usually have time to think about diversifying bank accounts. They are pulling all-nighters trying to build their product or service, raise capital, hire new engineers or accomplish dozens of other tasks required to build their nascent business. 

He said it made sense to work with SVB because it provided fast service, and his company, Suki AI Inc., was able to borrow from SVB on terms that bigger banks wouldn’t have matched.

SVB was the kind of bank, he said, that would set up a wire transfer over a weekend so that it would get to a vendor first thing on Monday morning. 

Mr. Soni said he hopes the bank survives in some form so his startup can keep working with it. “They understood my business. I don’t think that people can appreciate what a big deal that is,” he said.

Write to Katherine Bindley at [email protected], Rolfe Winkler at [email protected] and Berber Jin at [email protected]