Silicon Valley Bank’s close ties to the tech industry

When Kleiner Perkins, one of Silicon Valley’s most prominent venture capital firms, wanted to build a bridge between two of its office buildings circa 2005, it decided to take out a loan. He turned to Silicon Valley Bank, just 43 feet away on Sand Hill Road, the heart of the venture capital industry in Menlo Park, California.

To make the loan work for Kleiner’s project, which cost more than $500,000, SVB agreed to lend the money against the value of the fees the venture capitalist was to collect from its funds, four people said. knowing the situation.

SVB also provided personal banking services to many of Kleiner’s top partners, the sources said. This was in addition to the banking services and venture capital debt that SVB provided to many of Kleiner’s start-ups, as well as mortgages for the founders of those companies. SVB even invested in Kleiner’s funds, two people said.

And when SVB hosted an annual event in January on the state of the wine industry, it featured speakers from Wine.com, one of the world’s largest online wine retailers and a company in which Kleiner had already invested.

Before SVB went bankrupt last week and sparked a global financial panic, it was best known as a low-key regional bank. But within the tech ecosystem, the bank had adapted to the quirks and idiosyncrasies of the industry, becoming deeply intertwined to an unusual degree in the lives and businesses of investors, entrepreneurs and executives.

For 40 years, the institution has dealt with the failure of high-growth, high-risk tech start-ups and their backers to adhere to normal business practices. These companies prioritize rapid growth, change strategy frequently, and celebrate failure as a learning opportunity. They are often worth billions before they even turn a profit, and they can go from silly idea to monster with astonishing speed. More importantly, they rely on a tight web of money, workers, founders, and service providers to operate.

This unique and often irrational reality required a specialized bank.

“There were many ways Silicon Valley Bank was intertwined with the lives of people in Silicon Valley that was unique,” said Stanford finance professor Anat Admati. “The bank had connections and made connections with people all over Silicon Valley. It was a gathering point.

This week, SVB – which was taken over last Friday by the Federal Deposit Insurance Corporation – tried to pick up the pieces of its collapse. On Monday, he held a call with investors to tell them he had reopened business, even as he looked for a buyer.

Mark Suster, an investor at Upfront Ventures who was on the call, said he and his company were both clients of the bank. SVB also co-sponsored a conference Mr. Suster’s company recently hosted, and following the implosion, Upfront Ventures approved a letterco-signed by a group of companies, encouraging founders to retain or return 50% of their total capital to the bank.

“They understand that you will have money in several banks, they would like to be one of them,” Mr. Suster said. writes to start-up founders on Twitter.

An FDIC spokesperson did not respond to a request for comment.

SVB was best known for courting young, risky start-ups that other banks wouldn’t do business with. But his tentacles went far beyond that.

The bank has lent money to many large venture capital firms, including Andreessen Horowitz. From his own $9.5 billion fund, he has invested in start-ups including OpenDoor, a home-buying company, and Chainalysis, a cryptocurrency investigation start-up, as well as venture capital funds, including Sequoia Capital. He incubated some fintech companies that were building tools for early-stage investors. And he schmoozed the tech industry, sponsoring ski trips, conferences, industry newsletters and fancy dinner parties.

It was all part of the virtuous cycle that makes the tech industry work, investors and founders said. Whenever a start-up wanted a loan, the bank would talk to its backers, said Samir Kaji, who worked at SVB in the 1990s and is now chief executive of Allocate, a technology platform for venture capital investment management.

“There were constant touchpoints with investors,” he said. “Everyone knows each other.”

As Silicon Valley’s start-up industry flourished, SVB expanded its services, helping manage the outsized wealth the industry produced. This included providing lower interest rate mortgages to founders that other banks were not lending to. Many entrepreneurs are worth millions on paper but have little money in their bank accounts.

SVB has also branched out into tech-adjacent industries, such as wineries in the Napa and Sonoma Valleys, where many tech founders and executives spend their weekends. Last year, the bank lent $1.2 billion to wine producers.

California Governor Gavin Newsom, who welcomed SVB’s bailout last week, received loans for three of his wineries from SVB, according to the bank’s website.

SVB’s dominance was well known at Y Combinator, a start-up incubator. Dozens of tech founders who attended Y Combinator last year were invited to open bank accounts at SVB, and they were introduced to SVB bankers at Y Combinator events, three people who attended the show said. Y Combinator’s 2022 Tech Entrepreneur Class over the summer.

One described a cocktail party where he was introduced to an SVB banker who could provide his startup with a loan after graduating from the Y Combinator program. Six months later, when he needed a loan to buy his first house, he turned to SVB. The bank reviewed the valuation of her business, based on the money she raised in her first round of funding, and spoke to investors in her business. He made a loan after two other banks turned him down, he said.

SVB home loans were significantly better than those from traditional banks, said four people who received them. Loans ranged from $2.5 million to $6 million, with interest rates below 2.6%. Other banks refused them or, when given quotes for interest rates, offered more than 3%, the people said.

Drive Capital, a venture capital firm in Columbus, Ohio, did business with SVB and had lines of credit with the bank that allowed it to wire money to its start-ups faster than it could. ask its own backers to send money for each individual transaction. SVB has also invested in Drive Capital’s first fund and two of its portfolio companies. In total, a third of Drive Capital’s portfolio used SVB’s banking services, which included venture debt, a specialized type of credit for venture capital-backed start-ups.

“If you’re a venture capitalist or a start-up, it’s fair to say that in one way or another, SVB has touched every part of your business,” said Drive Capital investor Chris Olsen.

Sequoia Capital, a leading venture capital firm that has backed Airbnb, Apple and Zoom, has always recommended its start-ups open an account with SVB, Sequoia partner Mike Moritz wrote in a Financial Times opinion piece. Stripe, which is one of the most valuable private tech start-ups and counts Sequoia as its largest shareholder, used SVB for a product that enables international start-ups to set up businesses in the United States, it said. he noted.

Last week, Andreessen Horowitz’s partners sent a letter to its investors allaying concerns about SVB’s collapse, according to a copy of the memo reviewed by The New York Times. About half of the company’s start-ups had banking relationships with SVB, the memo said. The company also had an outstanding loan of about $16 million from the bank for “leasehold improvements” or renovations to the company’s offices.

Marc Andreessen, one of the founders of Andreessen Horowitz, called hedge funds and some of the world’s biggest banks to help find a buyer for SVB last week, two people familiar with the calls said. Another Andreessen Horowitz partner, Scott Kupor, handled the company’s panicked portfolio companies and investor questions.

A spokeswoman for Andreessen Horowitz declined to comment.

Start-up founder Matt Mireles met SVB when the bank invited him to their dressing room at the San Francisco Giants stadium in 2010. Ten years later, he struggled to get a home loan because his startup, Oasis, an artificial intelligence company that had raised more than $8 million in funding, was not profitable. He started thinking that the only way to own a house was to work for a big tech company.

But SVB reviewed Mr. Mireles’ venture capital funding and investor list and offered him a reasonable mortgage with a 20% down payment.

“That’s one of the cool things about Silicon Valley — the bank and the place,” he said. “These institutions made the entrepreneurial lifestyle – where you could take two or three failures to achieve a certain level of success – they made it viable for people.”

Last week, SVB’s greatest strength – its interconnected community of customers – became a double-edged sword. When venture capitalists began to worry about the financial solvency of the bank, it quickly caused panic in the start-up world.

That Thursday, SVB hosted a dinner at the South by Southwest tech festival in Austin, Texas, serving grilled salmon and filet mignon to a group of investors and startup founders at Perry’s Steakhouse.

As anxiety about the bank’s future spread through group chats, emails and social media, attendees began referring to the party as “the last supper.”

Jake Chapman, a Marque Ventures investor who attended the dinner, said he brushed off the host to ask about the brewing collapse and was pushed away. “She just said the balance sheet was strong,” he said.

The next morning, SVB customers attempted to transfer $42 billion in deposits from the bank, leading the FDIC to shut it down.