Many in Greater Washington’s startup community fear the fallout from Silicon Valley Bank’s closure will leave a gap in their funding options, especially given local community banks have not traditionally concentrated on their sector.
Silicon Valley Bank, based in Santa Clara, California, but with an active Arlington office for years, was the rare bank known to cater to startup and tech investments, in particular — an issue when a string of tech companies looking to cut costs and regain footing in this economic environment created a rush for deposits all at once earlier this month, essentially squeezing the bank dry.
It closes one door to potential capital for startups like Nevly, a D.C. fintech whose software helps lower-income residents and underserved communities boost their credit scores. Nevly CEO Eric Blue, who just raised pre-seed funding, said he recently spoke with a Silicon Valley Bank regional representative about what they could offer that conventional banks didn’t — and had planned to open an account with the institution.
“The startup community, VC and their portfolio companies will continue to have to adjust to the new reality,” Blue said this week. “Capital is no longer free.”
Local startup leaders and backers said in the near term, there should be less impact. The Biden administration hurried to insure deposits beyond the $250,000 cap to help contain the pain, but bankers and investors alike say the long-term effect of that action is still unclear.
While such disruptions “can be devastating to startups without a lot of margin for error,” for now, with that immediate protection for startup capital, “most will weather the storm,” said James Chung, associate vice president for research at the Office of Innovation and Entrepreneurship at George Washington University. “I do worry, however, about the lack of a startup-focused bank like SVB, which filled an important niche in the ecosystem. They understood the needs of their customer base in a way I think larger, more diversified banks may not. I hope they find a buyer or another player emerges to fill the niche.”
This comes at a bad time for young entrants to market, when fears of a recession or market correction had already been looming this year. At Halcyon, which invests in early-stage companies, the message was more about mitigating risk, “including scenario modeling and contingency planning,” said CEO Kate Goodall and Chief Investment Officer Dahna Goldstein in a joint statement to the Washington Business Journal.
“There is a lot of very understandable anxiety,” they said. “A handful of our portfolio companies were affected, so like everyone else, we experienced the full roller coaster of emotions through the weekend. These are the most important moments for investors to be a calm and moderating force, so we concentrated on communicating relevant and helpful information to our entrepreneurs and LPs, instead of the things that were beyond our control.”
VentureScope, a Tysons consulting and venture investment firm, had at least one portfolio company’s founders calling in tears, not sure how they were going to make payroll because their money was frozen with SVB. The venture firm, which is part of the Global Accelerator Network, said some of the resources being pushed out to startups over the weekend included suicide hotlines for panicked founders.
“It’s traumatic to the extent that startup organizations were rallying behind their founders. It wasn’t just: How can we help you make payroll? It was also: We’re there for you, if you need to talk to someone,” said Jason Chen, VentureScope’s founder and CEO. “It was good to see the startup world recognize that this isn’t just a dollar issue or money issue. It’s also a personal well-being and an emotional issue.”
Experts expect lasting effects, particularly for the fintech sector whose focus is often to help customers pay bills or manage finances. Given how many fintechs partner with banks of all sizes, risk management will likely need to be a new priority, said Ben Britt, managing partner of Alexandria’s Route 66 Ventures.
“Everybody’s going to probably start rethinking some of those things, about how you can make the system more resilient and less exposed to a single point of failure,” he said.
The key question, in the meantime, is who will now fill the gap that Silicon Valley Bank left in lending to younger, riskier enterprises looking to be the next Meta or Google. Locally, SVB was a frequent purveyor of the Small Business Administration’s Paycheck Protection Program loans, especially to often-riskier biotech and life sciences bets, and it backed companies like WageStream and ThreatQuotient, an Ashburn data security company that said it hit growth records last year.
“It’s telling that no one stepped in to buy SVB,” said Jonathan Aberman, a longtime serial investor and entrepreneur who’s currently dean of Marymount University’s College of Business, Innovation, Leadership and Technology.