While some of the dust has settled around Silicon Valley Bank’s demise, a number of second and third order effects are still looming. For startup-land, one of the biggest challenges on the horizon is the impending cancellation of startup credit lines. Silicon Valley Bank (SVB) was the largest provider of debt to startups, and still is as the new bank Silicon Valley Bridge Bank (SVBB). So, if the bank still has $6.7 billion dollars of loans out to startups what’s the problem?
The problem is that the majority of deposits have left the bank and aren’t coming back. Without deposits, the bank can’t lend as much. The bank has to maintain certain capital ratios, and with intense scrutiny, will be more conservative with how it uses deposits to make money. Many startups will still be able to keep a credit line, but it’ll likely be much smaller than in the past.
In addition, startups are difficult to underwrite. While the SVBB staff is being paid 50% more than their normal salary to stay on for 45 days, many will inevitably be let go because the bank has many fewer deposits, so it needs many fewer employees. Once a fair number of employees are let go, the volume of underwriting capacity will decrease, and the bank will opt to focus on the higher quality startups.
Finally, startups have shown they’ll happily move their deposits anywhere, as opposed to a small business owner that wants to work with the bank that’s in their neighborhood. As startups usually don’t have a local connection, there’s less emotional attachment to taking their deposits to other banks or putting money in t-bills and programs that spread deposits across multiple banks to maximize FDIC insurance. With fewer deposits as part of the story, startups are less desirable customers (banks that provide credit lines will still require banking with them, but more cash will be put in money markets that don’t help the bank as much).
How many startups might this apply to? Let’s do some rough math:
- $6.7 billion in loans from SVBB
- Guess of $3M average per startup (credit lines are typically 1/3rd of annual recurring revenue or some percentage of institutional equity in the startup)
- $6.7B divided by $3M results in 2,233 startups
This is only at SVBB. Add in Signature Bank, First Republic, and several others. Many thousands of startups will not have their credit lines renewed.
Another wrinkle is that thousands of startups have been using venture debt to fund the operations of their business. In the past, venture debt was encouraged as a safety net only to be used in times of emergency. With the great resetting of valuations, thousands of startups decided to use venture debt to buy more time and hopefully grow into their last valuation. It was no longer a safety net. Instead, it was a time bomb.
Net net, over the next 12 months as lines of credits come up for renewal, look for hundreds of startups to turn the keys to the business back to the bank. Cap tables are upside down with too much capital and not enough progress. Valuations have reset and in many cases the startup is worth less than the capital invested. All is not lost, but many more challenges lie ahead for the industry.