When Kleiner Perkins, one of Silicon Valley’s most prominent venture capital firms, wanted to build a bridge between two of its office buildings around 2005, it decided to take out a loan. It turns to Silicon Valley Bank, 43 feet away on Sand Hill Road in the heart of the venture capital industry in Menlo Park, California.
In order for the loan to fund Kleiner Perkins’ more than $500,000 project, SVB agreed to mortgage the loan against the value of the fees the venture capital firm was prepared to earn from its fund, said four people familiar with the matter.
SVB also provides personal banking services to many of Kleiner Perkins’ top partners, the people said. That doesn’t include the banking and venture debt that SVB provides to many of Kleiner’s start-ups, as well as the mortgages it provides to the founders of those companies. SVB even invested in a Kleiner Perkins fund, two of the people said.
When SVB held its annual event on the state of the wine industry in January, it featured a guest speaker from Wine.com, one of the world’s largest online wine retailers and a former Kleiner Perkins investor company.
Before SVB collapsed last week and sparked a global financial panic, it was mostly a low-key regional bank. But in the tech ecosystem, the bank has molded itself around the quirks and idiosyncrasies of the industry, becoming deeply embedded in the lives and businesses of investors, entrepreneurs and executives to an unusual degree.
For 40 years, the agency has pandered to the fact that high-growth, high-risk tech start-ups and their backers do not abide by normal business practices. These companies prioritize rapid growth, often switch strategies and celebrate failure. They are often worth billions of dollars before they turn a profit, and they can go from dumb idea to behemoth with astonishing speed. Most critically, they rely on tight networks of funds, workers, founders and service providers to operate.
This unique and often irrational reality calls for a specialized bank.
“Silicon Valley Bank is uniquely connected in so many ways to the lives of people in Silicon Valley,” said Anat Admati, a professor of finance at Stanford University. relationships and built relationships. It’s a rallying point.”
This week, SVB — which was taken over by the FDIC last Friday — is trying to pick up the pieces from the collapse. On Monday, it called investors and told them it was reopening, though it was looking for a buyer.
Upfront Ventures investor Mark Suster, who participated in the call, said he and his firm are clients of the bank. SVB also co-sponsored a recent conference hosted by Mr. Suster’s firm, and following the implosion, Upfront Ventures endorsed a letterco-signed by a group of companies, encouraging founders to retain or return 50% of their total capital to the bank.
“They know you’re going to have cash at multiple banks and they want to be one of them,” Mr Suster said. Write to Startup Founders on Twitter.
A spokesman for the FDIC did not respond to a request for comment.
SVB has a reputation for attracting young, risky start-ups that other banks would be reluctant to partner with. But its tentacles go far beyond that.
The bank provides cash loans to many top venture capital firms, including Andreessen Horowitz. From its $9.5 billion fund, it has invested in startups including home-buying company OpenDoor and cryptocurrency research startup Chainalysis, as well as venture capital funds including Sequoia Capital. It has incubated a number of fintech companies that build tools for start-up investors. It also courted the tech industry, sponsoring ski trips, conferences, industry newsletters and lavish dinners.
Investors and founders say it’s all part of the virtuous circle that keeps the tech industry going. Samir Kaji worked at SVB in the 1990s and is now CEO of Allocate, a technology platform that manages venture capital.
“There are ongoing touchpoints with investors,” he said. “Everyone knows.”
As Silicon Valley start-ups flourish, SVB has expanded its services to help manage the enormous wealth created by the industry. This includes offering low-rate mortgages to founders that other banks are unwilling to lend. Many entrepreneurs are worth millions on paper but have little cash in their bank accounts.
SVB has also ventured into tech-adjacent industries, such as wineries in 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 Praises SVB’s bailout plan Last week, he secured loans from SVB for three wineries, according to the bank’s website.
SVB’s dominance is well known at Y Combinator, a startup incubator. Dozens of tech founders who attended Y Combinator last year were told to open bank accounts with SVB and introduced them to SVB bankers at the Y Combinator event, according to three people who will attend Y Combinator’s 2022 Tech Entrepreneur Class this summer.
One described a cocktail party where he was introduced to an SVB banker who could lend money to his start-up 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 funding and talked to his company’s investors. It approved a loan after two other banks rejected him, he said.
Four people who received loans said SVB’s home loans were significantly better than loans from traditional banks. These loans range from $2.5 million to $6 million and carry interest rates below 2.6%. Other banks turned them down or offered more than 3 percent when they made rate quotes, the people said.
Drive Capital, a Columbus, Ohio-based venture capital firm, has a banking operation with SVB and has a credit line with the bank, allowing it to send money to its start-ups faster than requiring its own backers to send money for every deal. SVB also invested in Drive Capital’s first fund and two companies in its portfolio. A third of Drive Capital’s portfolio uses SVB’s banking services, including venture debt, a type of credit exclusively for venture-backed start-ups.
“If you’re a venture capitalist or a startup, it’s fair to say that SVB touches every aspect of your business in some way, shape or form,” said Drive Capital investor Chris Olson.
Sequoia, a top VC firm that backs Airbnb, Apple and Zoom, has been recommending its startups to open accounts with SVB, Sequoia partner Mike Moritz wrote in a note Financial Times Opinion ArticleHe noted that Stripe, one of the most valuable private tech start-ups, with Sequoia Capital as its largest shareholder, uses SVB’s products to enable international start-ups to set up companies in the US.
Last week, partners at Andreessen Horowitz sent a letter to its investors to allay concerns about SVB’s collapse, according to a copy of the memo seen by The New York Times. About half of the company’s startups have banking relationships with SVB, the memo said. The company also has about $16 million in outstanding loans from banks for “tenant improvements,” or corporate office renovations.
Andreessen Horowitz founder Marc Andreessen called hedge funds and some of the world’s largest banks last week to help SVB find a buyer, two people familiar with the matter said. Scott Kupor, another partner at Andreessen Horowitz, handles questions from panicked portfolio companies and corporate investors.
A spokesman for Andreessen Horowitz declined to comment.
In 2010, a startup founder, Matt Mireles, met SVB when the bank invited him to a box at the San Francisco Giants’ stadium. A decade later, he’s having trouble getting a mortgage because his startup, Oasis, an artificial intelligence company that’s raised more than $8 million in funding, isn’t profitable. He began to think that the only way to own his own home was to work for a major tech company.
But SVB looked at Mr. Mireles’ list of venture capital and investors and offered him a reasonable mortgage with a 20 percent down payment.
“It’s one of the coolest places in Silicon Valley — the bank and the place,” he said. “These institutions create entrepreneurial lifestyles—you might need two or three failures to achieve some degree of success—and they allow people to start businesses.”
Last week, SVB’s greatest strength — its interconnected customer community — became a double-edged sword. This quickly led to panic throughout the startup when venture capitalists became concerned about the bank’s financial solvency.
That Thursday, SVB hosted a dinner at the South by Southwest Tech Festival in Austin, Texas, serving chargrilled salmon and filet mignon to a group of investors and startup founders at Perry’s Steakhouse.
As concerns about the bank’s future spread in group chats, emails and social media, attendees began referring to the gathering as the “Last Supper”.
Marque Ventures investor Jake Chapman, who was at the dinner, said he pulled the host aside to ask about the brewing crisis, but was rebuffed. “She just said the balance sheet is strong,” he said.
By the next morning, SVB’s customer had try to transfer $42 billion in deposits from banks, causing the FDIC to shut them down.
