Over the 40 years prior to its implosion last week, Silicon Valley Bank had integrated itself into the tech and venture community to an almost remarkable degree. Customers included tech companies as various as Roku, Etsy, and Roblox and venture firms like Andreessen Horowitz and Sequoia Capital. If a tech startup went public—or even got funding, for that matter—there was a good chance that at some point they banked with SVB.
“They were kind of the fabric of the ecosystem,” Logan Bartlett, a New York venture capitalist, told me in a direct message. Every time a scrappy startup received funding, there was a decent to good chance the capitalist venturing it would shuffle them over to SVB, where they would open an account to receive the money they had worked so hard to obtain. For a long time, this all happened in the background, a boring footnote to the exciting story of Silicon Valley.
But following the company’s collapse last week, people began to ask why a single, lesser-known bank had successfully won over one of the most politically, socially, and economically significant industries of the century.
“Why did such a large share of the VC industry use a single bank? Why did they encourage portfolio companies to use the same bank?” asked the Substack writer Matt Yglesias. In a prior life, Yglesias had helped found the news company Vox Media. He noted the East Coast-based company had come to bank with SVB for reasons even he didn’t seem to know, outside of the fact that they had raised VC money.
According to both venture capitalists and entrepreneurs, the reason for SVB’s rising dominance of the sector is a story about what one bank offered that so many others didn’t. In SVB, Silicon Valley founders and VCs had found a rare partner who was willing to provide credit cards and venture debt to startups with no revenue, and otherwise accept the risk inherent in banking startups. More than that though, SVB made a business out of supporting—critics might say coddling—the venture class and founders themselves, helping them to buy homes when they couldn’t get a mortgage elsewhere.
“They just tied it all together in this really comprehensive offering that serviced the startups, the founders for their personal needs, the VCs for their funds, the VCs for their personal lives, so they can have money to invest in their funds,” said one San Francisco-based venture capitalist, who was not allowed by his firm to speak on the record.
The people involved say there was nothing nefarious about the cozy and close setup. This was simply the “cost of doing business” with some of the most powerful people in the industry, both now and later, said tech entrepreneur Anil Dash, who has worked with companies that banked at SVB, though his own companies never did. Another term for this is relationship banking, a more traditional and personalized approach in which a bank does what it can to keep a customer happy so that they don’t move their business elsewhere.
“It's a networks and relationships business: if they do good work for VCs, they get recommended to portfolio companies,” said Byrne Hobart, who writes The Diff, a finance and tech-focused newsletter.
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SVB—like the also-now-struggling First Republic Bank, another San Francisco-based financial firm that famously offered Mark Zuckerberg a below-market 1 percent mortgage rate—would “go out of their way to bank us because then they might be able to bank our portfolio companies,” said Jake Gibson, who founded the personal finance company NerdWallet before starting Better Tomorrow Ventures.
The bank’s services were invaluable to venture capitalists. It would manage venture funds' money, partners’ personal money, and sometimes even invested in venture funds, said Bartlett. (The bank’s venture arm reportedly had invested hundreds of millions of dollars into funds created by Sequoia Capital and Andreessen Horowitz.) It would also offer short-term loans to funds, make connections to potential limited partners, and, “if it all works out, down the line we might be taking out mortgages or using their wealth managers,” said Gibson.
The San Francisco-based venture capitalist said the bank was particularly willing to serve the VCs in a way that fit their “special needs.” In particular, he said, VCs tend to be cash poor early on, as they have to put a lot of their own money into funds, and Silicon Valley Bank would let the VCs borrow money “in order to invest in their own funds,” he said.
“Now, in return, of course, VCs would recommend Silicon Valley Bank to their startups,” said the San Francisco-based VC, who added that it wasn’t necessarily a contractual obligation, but a matter of goodwill: “They take care of the VCs. VCs make sure that their startups are taken care of. Silicon Valley Bank makes sure that the startups have adequate capital.”
In that way, the bank itself operated like the VCs it attracted, making a lot of individually risky bets in the expectations that a few would pay off disproportionately. But in another, it played a critical role at the center of an ecosystem that likes to move fast and break things—one that other, larger banks seemed largely uninterested in.
“It is simultaneously both the plaything of the oligarchs and one of those rare things that genuinely felt like a community connection between people,” said Dash.
After a venture fund agreed to fund a startup, the first step was often for the company to set up a bank account with SVB. When they did that, they would receive the money. Startup founders who had put their “heart and soul” into raising the money wouldn’t “even think about it,” said Dash. It was a simple bank account, a small concern for stressed-out founders.
Robert McLaws, the co-founder and CEO of the startup BurnRate, was pleased when his company first joined SVB in January 2018. He had done so because it was a part of the package offered by Stripe’s Atlas program, which makes forming companies easier. To many founders, an account with SVB became a source of pride, lending their startup an air of legitimacy. “They're the bank you want to work with as a startup founder,” said McLaws.
The wide use of SVB allowed for business to move smoothly in the startup world. Internal wire transfers, for one, occurred quickly. “That allows things to move more efficiently and actually builds trust,” said Dash. A young startup’s first customers were often local, Silicon Valley-based people and businesses, which meant that money would come quickly too. The bank’s services also extended beyond the financial. It took advantage of its community of founders by offering to connect them and offer them lessons in capital management, raising money, and lines of credit, according to Varun Badhwar, the founder and CEO of the tech startup Endor Labs.
Badhwar said the customer service felt like a “white glove” treatment. He had someone at a senior level who was willing to help him with whatever problem they faced. “I can text them. I can call them. Even on Thursday, when they were all in trouble, in two minutes, I got a call back,” said Badhwar.
To a lot of startup founders, just getting attention was a plus. Historically, traditional banks have had a hard time trying to figure out what to do with tech startups, particularly ones founded by a couple of young people with little credit history, no revenue, and only a few hundred thousand dollars in funding from a few rich people to their name. “It's just not something they really understand,” said Alex Miller, the CEO of the developer tool builder Hiro Systems, a digital assets company. Oftentimes, such startups would get turned away or offered nothing more than a basic checking account. Credit cards were often out of the question. By comparison, SVB welcomed founders, not only providing them with accounts, but loans, credit cards, and more. “They were so eager and happy to work with startups, instead of making you fight them to get an account in the first place,” said Miller. If they received a referral from a top VC, even better, and they would be prioritized and supported to an even greater degree, said venture capitalist Ari Newman.
Whereas more traditional bankers wanted to see balance sheets and income statements, SVB would consider more atypical measures, like the founder experience, burn rate, business plan, runway, and cap table, SVB customers told me. Crucially, they also carefully considered who the venture capitalists were that were backing the startup. “They could look at a company and say, ya know the finances are a bit off but they’re backed by good people,” said Bartlett, the New York venture capitalist.
That proved particularly useful to young companies with little to no revenue but powerful figures vouching for them. When the bank needed a reference check, SVB’s community of venture capitalists moved quickly, allowing the bank, unusually, to move at the speed startups were used to. “SVB was much easier to work with than the larger banks,” said Gibson.
SVB’s willingness to provide young startups with lines of credit also proved beneficial, allowing startups to push to grow faster and harder and make the most of their funding. “They were adding extra fuel for high-risk, high-return businesses that were venture-backed,” said Newman.
The reason it was willing to take these unusual risks is because it understood that today’s cash-poor entrepreneur could be tomorrow's billionaire, and that billionaire would soon need a mortgage, wealth management services, and, maybe most importantly, have other rich friends and invest in startups too.
“They [would] make those investments not just on your bank balance today, but on the promise of what you will be in the future,” said Badhwar. It was also there when others weren’t. Adii Pienaar, founder of the startup Cogsy, said he opened up an account with SVB in 2020 after numerous retail banks in the United Kingdom rejected him, citing COVID-related backlogs. SVB was the only bank he could find that was “willing to help,” said Pienaar.
Unlike many others, McLaws became frustrated with the bank over time, particularly its monthly fees and technology, which he said felt antiquated compared to the competition. “Every single time I logged in, it made me feel like I was using Microsoft Money in 1997,” said McLaws. He couldn’t even use FaceID to log in on his iPhone, an ironic omission for Silicon Valley’s bank, he said: “You could walk out of any of their branches in Silicon Valley and throw a rock in any direction, and hit a developer that probably could have helped you solve that problem.”
The lack of concern made him start to see the bank differently. He started to believe that Silicon Valley Bank’s “primary customers” were the VCs.
McLaws was one of the few people I spoke with who had much of anything negative to say about Silicon Valley Bank. Peter Gulliver, the CFO of the real estate company Spruce, said SVB’s willingness to pull out “all sorts of bells and whistles” for VCs and founders was one of the key ways it differentiated itself.
The decision to help founders and VCs buy homes could come across as tone deaf, as Dash put it, but it also proved valuable to an unorthodox group whose wealth wasn’t reflected on a W2. Even if entrepreneurs are theoretically worth millions or even billions on paper, they are often low on cash and don’t make much in the way of traditional income. which can make it “virtually impossible to get a loan for a house,” McLaws said. SVB, by comparison, was willing to weigh equity when considering them for a home loan, allowing many founders to become homeowners when they otherwise might not have been able.
The San Francisco-based venture capitalist said the bank proved helpful when he wanted to upgrade his home a few years ago. He hoped to buy his new home before selling his old one, so he asked for a personal loan from the bank that they could convert into a mortgage after he sold the first home. It wasn’t normally something the bank would do, it said. It helped him anyway.
“No other bank would work with me in this way,” the venture capitalist said. “So was that a sweetheart deal for the VCs? Yeah, maybe, kind of. But I can also argue differently. They took a bet on me that if I'm successful, and they build this goodwill that they're going to be able to monetize that goodwill in the form of banking companies I’m involved with.”
The relationships VCs had with the bank could prove particularly useful when things started to go bad for a portfolio company. The same VC said he could go to the bank and ask for an extension before debt payments started to kick in so they could raise a round, and often the bank would agree, he said. “They worked with us. They got the business like no other bank.”
SVB had made a bet that there was money to be made by being the bank for an unconventional sector of the economy and in recent years started to reap the rewards, rising alongside the broader tech sector to become the 16th biggest bank by assets in the country last year.
“They were right and early about the potential of the Bay Area tech world,” said Hobart, who writes The Diff.
By the time competitors came along, SVB already “owned so many relationships with people across the board”—and continued to treat them well enough—that they were able to benefit from the network effects of the community they had formed, said Bartlett. Silicon Valley remained the “gold standard,” said Newman.
Perhaps it worked too well, as the bank’s “deposit base was tied to the flows of capital into the tech world,” said Hobart. In the end, so was its fate. During the COVID-19 pandemic, capital flowed into Silicon Valley in a real way, and, by extension, into the Silicon Valley Bank; deposits rose from less than $75 billion in 2020 to $175 billion by the end of last year.
“Excess deposits” had always been a “big concern” to SVB, as venture-backed technology companies tended to deposit many times more than they borrowed, former SVB CEO Ken Wilcox told a class in 2008, according to a video of the presentation. “Every other bank is looking for deposits. They’re dying to get their hands on deposits. We’ve got tons of them,” he said then. “Can you imagine what a problem that is? Because you’ve got to do something with them. You can’t just sit on them.”
This time, SVB invested the excess deposits in long-term, illiquid bonds and securities, which became a bad bet once inflation (and, soon enough, interest rates) started to rise.
Rising inflation also led to a slowdown in the VC sector. As the endless flow of venture dollars suddenly appeared finite, cash-burning startups started to pull from their available deposits. With so much of their new money tied up in securities and bonds, the bank started to grapple with liquidity issues.
“The inflow of VC mania and then outflow of burning cash hurt them. But that didn’t bring them under,” said Bartlett, “Risk management brought them under.”
But SVB wasn’t the only bank to bet on mortgage securities and bonds. What made SVB unique was the “densely networked,” highly connected and wealthy client base it had cultivated over the previous four decades. Approximately 96 percent of its deposits were uninsured, meaning they were held in an account with more than $250,000 in it, a much higher percentage than the typical bank. One CEO of a community bank in West Virginia wrote this week that having a concentrated deposit based “heavily on startups financed by venture capitalists” was “extremely risky in itself.”
When VCs started to hear about potential issues, they weren’t just worried about one account, startup, or fund, but everything they had.
“To the VCs, any risk to SVB is a risk to their entire portfolio,” said Hobart. “So the SVB deposit base was a lot less stable than it looked.”
Some VCs urged portfolio companies to stay and hold on, but others told everyone to quickly jump ship. In that way, the company’s “success contributed to their failure,” said Hobart.
Not long after California regulators shut down SVB, startup founders and VCs started to feel the loss of the bank.
“The big banks don't want our fund business. They require crazy minimums making it out of reach for most of us. Literally hundreds of fund managers are scrambling to figure out where to diversify their banking right now,” Jenny Fielding, who runs a New York venture fund, wrote this week.
Badhwar, the CEO of Endor Labs, said he already misses the treatment he received at SVB. On Saturday, one of his investors introduced him to someone at a large bank to help him open an account. He filled out a spreadsheet of information, and the bank said he’d have an account by Tuesday. When he followed up, he was sent to commercial business, then to business banking, which asked him to fill out the same information once more.
“These larger financial institutions,” he said, “are just not built to cater to our needs.”
Correction: A previous version of this article incorrectly said Alex Miller is the CEO of the digital asset company Stacks. He is the CEO of Hiro Systems.