A view of Silicon Valley Bank’s headquarters in Santa Clara, California, after the federal government intervened in the bank’s collapse, on March 13, 2023.
Nikolas Liepin | Anadolu Agency | Getty Images
Silicon Valley Bank was the go-to bank for startups looking for bankers who understood startup life and balance sheets. That was especially true for the cohort of startups being built and scaled to address climate change.
After a very stressful weekend for many startup founders and investors, bank regulators hatched a plan to back down SVB’s deposits, to ensure that depositors do not lose their money.
SVB was founded in 1983 specifically to help startups and had a strong and established business in climate, with 1,550 customers in climate technology and sustainability, according to its website.
“Silicon Valley Bank had a very good reputation in the energy transition space and was willing to put its money where its mouth is, unlike many of its peers,” said Mona Dajanihead of renewable energy and infrastructure law at Shearman & Sterling.
“Many clean energy companies banked with SVB because they had an established and dedicated clean energy practice and they were seen as having more experience in the clean energy space than most regional and large bulge bracket peers,” Dajani told CNBC.
But the climate space has grown since SVB started and it paves the way for new lenders to serve the market.
“Basically, the companies coming out of the climate right now have real strength. These are seed companies and people will want to lend to them because they’re good business,” explained Katie RaeCEO of The enginean accelerator and venture fund focused on “tough technique“, including climate startups.
“Just in the last three days, I probably have 50 emails in my inbox from different vendors saying, ‘Hey, I know SVB is not in good shape. We also do venture debt.” So many will emerge, Rae told CNBC in a telephone call on Tuesday.
Wind turbines operate at a wind farm, a major source of power for the Coachella Valley, on February 22, 2023 near Whitewater, California.
Mario Tama | Getty Images
Understand how startups work
Venture-backed startups are an unusual type of business. In their early stages, they may not have cash flow, revenue or even customers. Instead, they rely on venture funding, where investors offer cash in exchange for equity, hoping that startups prove their technology, find customers and eventually grow into giants.
Providing banking services to that type of customer requires special skills and an appetite for risk.
“No one understands startups like Silicon Valley Bank and how to lend to them,” says Zachary Boguea long-time tech investor and co-founder of DCVC.
“I imagine a startup’s application being simplistically wiped out by a big bank’s risk committee,” Bogue told CNBC.
It was exactly that Bill Clericoexperience back in May 2009. When Clerico moved to Silicon Valley with Rich Aberman to grow his fintech company, We are payingthey had a Bank of America small business account, but the account didn’t have the services the startup needed.
“Silicon Valley Bank understood that even though we might only have $10,000 or so in deposits at the time, we had a lot of potential,” Clerico told CNBC.
As it turned out, SVB was right to bet on Clerico. WePay was acquired past JPMorgan Chase in December 2017.
“That early investment in our relationship paid off,” Clerico told CNBC. “Over time, our deposit balances grew into the hundreds of millions, we borrowed millions from them in subprime loans, and we processed billions through their accounts.”
In January 2022 Clerico launched Convective Capital, a venture capital of $35 million fund that invests in technology for forest fires. He sincerely hopes that someone can fill the gap after SVB.
“Some people might confuse their balance sheet-driven meltdown with the failure of this startup-focused business model — but the truth is, I think banking startups continue to be a great business and a role that somebody needs to fill,” Clerico told CNBC. (Notably, Clerico is an angel investor in Mercurya startup working to meet this need.)
“I hope SVB and their business model survives in some form,” Clerico said.
The “1,000-pound gorilla” of subprime lending
In the climate technology ecosystem, SVB was particularly prominent when it came to providing loans to companies with venture capital financing, so-called “venture debt”. That’s important for startups that still aren’t generating enough cash flow to be self-sustaining, especially when they’re between funding rounds.
“It adds a little bit to the capital that they’ve raised, extends their runway a little bit and gives them more time to make progress in their business,” Rae told CNBC. Venture debt can add between three to six months to the landing companies already have, Rae said.
“There are other places venturing into debt, but Silicon Valley Bank was the 1,000-pound gorilla in the room,” said Ami KassarCEO of the business loan consultant Multi-financing.
“The concern now is that even in cases where deposits are made whole, the credit facilities for companies with SVB are likely to be no longer available, and this is a sector where they are critical,” Dajani said.
That said, lending to venture capital firms is a riskier endeavor than traditional banking, Kassar told CNBC.
“I’ve always wondered how they managed to get the regulators to let them have such a large concentration of subprime debt,” Kassar said.
Solar panels are set up at the Solar Farm at the University of California, Merced, in Merced, California, on August 17, 2022.
Nathan Frandino | Reuters
Climate is good business
SVB was an early supporter of climate technology and helped many climate technology companies get started. However, as the sector has matured, participants believe that other financiers will be more willing to lend to these companies.
“Silicon Valley Bank’s early support and commitment to supporting climate tech startups really helped catalyze the massive migration of capital that you’re now seeing deployed into the sector,” Adam Braun, a founder of the climate startup The climate clubtold CNBC.
For example, SVB provided financing for 60% of the community’s solar energy projects Kiran BhatrajuCEO of Arcadiaa climate technology company that, among many services, helps people connect to municipal solar projects.
In this, the bank was “a climate banking pioneer”, said Steph Speirsco-founder and CEO of Solstice Power Technologieswho have built a technology to help connect people to municipal solar projects.
“But renewable energy has come a long way in the last decade and there is now a much wider universe of potential funders looking to get on board,” Speirs said.
That’s what Braun expects to see, too.
“I think we’re going to see a lot more institutions build dedicated climate practices and funds to support startups emerging in this space,” Braun told CNBC. “While SVB may have been a first mover, I do not believe that the events of last week will diminish the will to fund and support the emerging companies that are leading the fast-growing climate technology sector forward.”
First Republic and JPMorgan are “increasingly making this category a priority,” Chauncey Hamilton, a partner at venture capital firm XYZ, told CNBC. “More and more banks are paying attention to the climate,” Hamilton said.
Mark Casadya founder of the venture capital company Vestigo Venturesagree with.
“Climate solutions are too powerful a force to be stopped by a bank failure,” Casady told CNBC. “The need is critical and time is not on our side to find solutions. As this is a fundamental need, it will receive more support rather than less.”
However, that transition will take time. And for companies working to combat global warming, time is the ultimate enemy.
“I expect big banks will eventually step up and provide the funding the industry needs to move forward – these projects are simply too attractive and the promise of climate technology too great. But it will take some time and delays may become costly in the fight against climate change, Bhatraju told CNBC.
“With all the new investments in climate technology and the opportunities that are in front of us through the IRA (Inflation Reduction Act), there is a lot of momentum. We don’t want to lose that,” Bhatranju said.
Correction: An earlier version of this story misspelled Chauncey Hamilton’s name.