June 14, 2024


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Silicon Valley Bank’s deep ties to the tech industry

Silicon Valley Bank’s deep ties to the tech industry

When Kleiner Perkins, one of the largest venture capital firms in Silicon Valley, wanted to build a bridge between two office buildings around 2005, it decided to take out a loan. Turned into Silicon Valley Bank, just 43 feet away on Sand Hill Road in the heart of the venture 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 amount of fees the venture capital firm was set to earn, four people familiar with the situation said.

The people said SVB also provided personal banking services to many of Kleiner’s large partners. That was in addition to the banking and project debt that SVB provided to many of Kleiner’s start-ups, as well as mortgages to those companies’ founders. Two people said that SVB invested in Kleiner’s money.

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

Before SVB failed last week and triggered a global financial panic, it was mostly known as a low-key regional bank. But within the tech ecosystem, the bank has shaped itself according to the quirks and idiosyncrasies of the industry, becoming deeply entwined to an extraordinary degree in the lives and businesses of investors, entrepreneurs, and CEOs.

For 40 years, the Foundation has addressed the fact that high-growth, high-risk tech startups and their backers don’t adhere to normal business practices. These companies prioritize rapid growth, frequently change strategies and celebrate failure. They are often worth billions before they turn a profit, and can go from a ridiculous idea to a giant corporation incredibly quickly. Most importantly, they rely on a tight network of money, workers, founders, and service providers to operate.

This unique and often irrational reality requires a specialized bank.

“There were a lot of ways that Silicon Valley Bank was entwined in the lives of Silicon Valley residents and it was unique,” ​​said Anat Admati, a professor of finance at Stanford University. “The bank had relationships and built relationships with people across Silicon Valley. It was a rallying point.”

This week, SVB — which was acquired by the Federal Deposit Insurance Corporation last Friday — has tried to pick up the pieces from its collapse. On Monday, she placed a call with investors to tell them it was reopening for business, even as it was looking for a buyer.

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Mark Sastre, the Upfront Ventures investor who was on the call, said he and his firm were clients of the bank. SVB also co-sponsored a conference hosted by Mr. Soester’s firm recently and, in the aftermath of the implosion, endorsed Upfront Ventures. lettersigned by a group of companies, to encourage the founders to keep or return 50 percent of their total capital with the bank.

“They realize that you will have cash in several banks, and they want to be one of them,” Mr. Sastre I wrote for startup founders on Twitter.

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

SVB was known for courting young, risky startups that other banks couldn’t handle. But her claws are far beyond that.

The bank has lent money to several major project firms, including Andreessen Horowitz. From her $9.5 billion private fund, she has invested in startups including OpenDoor, a homebuying company, and Chainalysis, a cryptocurrency investigation startup, as well as venture capital funds including Sequoia Capital. It embraced some fintech companies that were building tools for early stage investors. The tech industry has dazzled, sponsoring ski trips, conferences, industry newsletters, and fancy dinners.

Investors and founders said it was all part of a virtuous cycle that gets the tech industry moving. Any time a startup wanted a loan, the bank talked to its backers, said Sameer Kaji, who worked as an SVB in the 1990s and is now CEO of Allocate, a technology platform for managing venture investment.

“There were constant points of contact with investors,” he said. “Everyone knows each other.”

With the startup industry booming in Silicon Valley, SVB has expanded its services, helping to manage the huge wealth that the industry has generated. This included providing low-interest mortgages to founders that other banks would not lend to. Many entrepreneurs are worth millions on paper but have very little money in their bank accounts.

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

Gavin Newsom, Governor of California He praised the SVB rescue plan Last week, he received loans for three of his wineries from SVB, according to the bank’s website.

One described a cocktail hour mixer in which he was introduced to an SVB banker who could lend his startup once he graduated from Y Combinator’s program. Six months later, when he needed a loan to buy his first home, he went to SVB. The bank looked at his company’s valuation, based on the money it raised in its first round of financing, and spoke to his company’s investors. He said she was granted a loan after it was rejected by two other banks.

Four people who received these loans said that the mortgages SVB obtained were much better than those provided by traditional banks. The loans ranged from $2.5 million to $6 million, with interest rates as low as 2.6 percent. People said other banks had turned it down or, when bidding interest rates, offered more than 3 percent.

Drive Capital, an investment firm in Columbus, Ohio, dealt with SVB and had lines of credit with the bank that allowed it to funnel money to its startups faster than asking its backers to send money for each individual trade. SVB also invested in Drive Capital’s first fund and in two of its portfolio companies. In total, a third of Drive Capital’s portfolio used banking services offered by SVB, which included venture debt, a specialized type of credit for venture-backed startups.

“If you’re a venture capitalist or a startup, it’s fair to say in some way, shape or form, SVB has touched every part of your business,” said Chris Olsen, investor at Drive Capital.

Sequoia Capital, a major investment firm that supports Airbnb, Apple and Zoom, has always recommended its startups to open an account with SVB, Mike Moritz, a Sequoia partner, wrote in a blog post. Opinion article in the Financial Times. He noted that Stripe, which is one of the most valuable private tech startups and counts Sequoia as its largest shareholder, has used SVB for a product that allows international startups to form companies in the US.

Last week, the partners at Andreessen Horowitz sent a letter to its investors assuaging concerns about SVB’s implosion, according to a copy of the memo reviewed by The New York Times. About half of the company’s startups have banking relationships with SVB, the note said. The company also took out an outstanding loan of about $16 million from the bank for “tenant improvements,” or renovations to the company’s offices.

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Andreessen Horowitz founder Marc Andreessen contacted hedge funds and some of the world’s largest banks to help find a buyer for SVB last week, two people familiar with the calls said. Scott Kobor, another Andreessen Horowitz partner, dealt with panicked portfolio companies and questions from the company’s investors.

A spokeswoman for Andreessen Horowitz declined to comment.

Matt Mirelles, founder of the startup, met SVB when the bank invited him to his box at San Francisco Giants Stadium in 2010. Ten years later, he had difficulty getting a mortgage because his startup Oasis, an artificial intelligence company that had raised more than 8 Millions of dollars in financing, unprofitable. He begins to think that the only way he can own a home is if he works for a big tech company.

But SVB looked into Mr. Mirelles’ investment financing and investor list and offered him a reasonable mortgage with a 20 percent down payment.

“That’s one of the great things about Silicon Valley – the bank and the place,” he said. “These organizations have made the entrepreneurial lifestyle — where you have to fail two or three times to get to a certain level of success — they’ve made it workable for people.”

In the past week, SVB’s greatest strength – its close-knit customer community – has become a double-edged sword. When venture capitalists began to worry about the bank’s solvency, it quickly led to a panic throughout the startup 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 concern 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, the Marque Ventures investor who attended the dinner, said he pulled the host aside to ask about the fermented meltdown and was denied. “She just said the balance sheet is strong,” he said.

By the next morning, the SVB agents had Try converting $42 billion in deposits from the bank, prompting the FDIC to close it.