The collapse of Silicon Valley Bank left a lot of fintech and insurtech companies wondering where their operating capital would come from not just in the near term. At a time when VC funding is already slowing down, funders are likely to be even more careful and deliberate in supporting new companies. What does that mean for how new entrants should approach their businesses, strategically? Digital Insurance editor in chief Nathan Golia is joined by American Banker executive editor for technology Penny Crosman to talk about what's to come for startups in financial services.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Nathan Golia (00:09):
I am Nathan Golia, the editor in chief of Digital Insurance. Very special guest today, Penny Crosman from American Banker. We're actually in our home office today. You usually see me doing these from my home, but in our home office in New York, we've got my American Banker pen. Very good. This was in the supply closet. We were very, very nice to see that. Yeah. Penny, why don't you introduce yourself and tell you how you're sort of our counterpart over on the banking side.
Penny Crosman (00:31):
Sure. Thank you very much for having me, Nate. I'm Penny Crosman. I'm executive editor of Technology at American Banker. So American Banker covers the sort of traditional banking world and the banking FinTech world, whereas digital insurance covers the digital insurance world. There's some overlap, and in fact, our topic today is startups. We both write a lot about startups because in the financial industry it had been a very welcoming environment for startups, and then lately it's been a tougher environment. So we're going to talk a little bit about that.
Nathan Golia (01:04):
Right. And that's why I was, so we don't often get a chance to do these kinds of cross brand where we have this aligned sort of concern, but just like we in insurance are working with an InsureTech community of startups, so too is banking with FinTech startups. And the collapse of SVB was sort of the, I don't want to say last domino because that sounds like a curse waiting to happen, but there's been a lot of pressure mounting on financial technology startups in insurance and in banking over the past year or so, especially coming out of Covid. And when we were talking about the SVB collapse, obviously American Banker did a lot of great reporting on what actually happened and to the bank functionally, and we'll talk a little about that in a second, just sort of set it up. But Penny and I were talking about what are you hearing from the people who were clients of this bank, the people that we talked to who we know are in the startup community. So I, let's talk about that today. Before we get into that, maybe since you're a banking expert, I will just 30 seconds, what did happen? What happened here?
Penny Crosman (02:05):
I mean, the way I look at it, there were a lot of pieces to it. Silicon Valley Bank was very highly concentrated in the tech community and a lot of tech clients, a lot of venture capital clients. And that was great. For many years, it had been the primary bank to tech companies and startups for around 20 years. There was kind of a boom in the tech market in 2020. In 2021. Also, there was a lot of money flowing from venture capital firms to startups, tremendous growth, startup growth, funding growth. Then in 2022, the bubble started to deflate and valuations came down. The economy started to falter a little bit. People started coming back to work. So the emergency situation of trying to upgrade all your technology to remote to handle remote work kind of died down. And there more of there had been sort of a return to normal circumstances and venture capitalists started sort of rethinking their strategies.
(03:28):
And instead of just wanting growth, growth, growth, they wanted startups to start showing profitability or a path to profitability. So it became tougher for startups to raise funds to launch IPOs. So that was already happening. And as a consequence, a lot of the tech startups that Silicon Valley Bank was working with started withdrawing money from the bank to help fund their operations. And that made the bank start to sell off some of its assets. It had a lot of treasuries and mortgage backed securities. It ended up selling a bunch of those assets at a loss, about a 1.8 billion loss. The news of that loss triggered it spread like wildfire throughout the tech and venture capital community. And people sort of went into panic mode. A lot of VCs started telling their portfolio companies to just pull all their money out of the bank at once. So it was a balance sheet issue that involved market concentration risk and also asset liability management risk where they ended up having deposits that were highly riskier than they thought, and then long-term assets that were hard to sell. But then there was a good old fashioned run on the bank that was triggered by that loss that they suffered. So there are other moving parts to it as well, but I think that's the basic framework of what
Nathan Golia (05:19):
Happened. Well, what's interesting, and of course we mentioned it a few times that they were concentrated with startups. And we work with startups all the time. Digital insurance is in many ways about startups. And you have this concentration. I talked to a couple people in the wake of this who said, yeah, I have been a founder, or I've been an entrepreneur in Silicon Valley for 30 to 40 years, and this was the bank that you went to. You went to them because they understood you. And of course, this panic mode that you mentioned, this sort of old fashioned bank run. I talked to another founder who told me, I could not imagine a bank run happening. It sounded like something that would've been in the history book. When was there going to be a bank run? And so when we say the upshot here, and of course we could say there's a lot of different kinds of startups. One thing that I think is interesting actually is that this was, if you're a banking startup, you have a little bit of vision into how banking works. And if you're an insurance startup, you have a little bit of vision into risk. And obviously or not, there's more than two kinds of startups. But yeah, what's interesting is to hear what did you hear in the wake from your FinTech context about what they were thinking about their operations and their thought about the banking system going forward
Penny Crosman (06:42):
As all this was happening or Yeah.
Nathan Golia (06:45):
And now it's been a couple of weeks since we conceived this idea and things that sort of set a little bit, but maybe you can sort of take us down your path a little bit, what you've peered people.
Penny Crosman (06:51):
Yeah. Well, it's definitely, the bank was shut down on a Friday, I think March 10th. And that was a rough weekend for a lot of people. One FinTech founder I spoke to said he fielded 220 calls that weekend
(07:04):
From other startup founders who were very, very worried about would they be able to make payroll the next week? Was their money safe? What were they going to do without this bank? Then fortunately on Monday, the FDIC said that all deposits would be insured. So the money was safe, they were okay. It ended up being shareholders, the people who had invested in the bank that were the ones that suffered, but the money was safe. And then the next challenge for startup customers of the bank, I think was they had to figure out where they were going to put their money Now, so some of the people I spoke to went to First Republic. A lot of startups went to the four biggest banks, which are considered too big to fail. So the money you put there is considered safe for life. And then there were a couple of startups, not really startups anymore, but a couple of Fintechs, Brex and Mercury that both offer sweep accounts where you put your money with them and anything that's over the $250,000 FDIC insurance limit, they will put into a money market fund at a big bank like BNY Mellon, or they will spread it across several banks. So that money is totally covered.
(08:29):
And that's something that a lot of fintechs are thinking about now, getting some kind of sweep account or some kind of account. Sometimes banks call this broker deposits where you put your money with them, but they really segregate the money out between eight different banks or however many you need because FDIC insurance covers $250,000, but for most companies, that doesn't begin to cover operating costs, payroll, all the money you need to run a company. So that's one big change that's happening. I think a lot of fintechs are trying to figure out what will be the big banker to startups and tech companies now, first Citizens Bank has bought Silicon Valley Bank and they have said, we welcome all tech companies and startups. Our doors are open, but I think it remains to be seen how spooked people are by what happened, and if people will really want to come back, put their money back into this bank, the new incarnation of this bank that failed and that caused them so much angst.
Nathan Golia (09:36):
Yeah, I got to say, I have done like a hundred webcasts, a bunch of dig in sessions, my first phone, first time my phone has gone off. I figures. It's in front of everyone I work with. Yeah, I think that what was interesting, you mentioned Brex, and I'm sorry, mercury I think is the other company, but they have a product here that's going to, and a product that, and that was something that we heard a little bit about in InsureTech as well, different kinds of risk management products that could be offered down the wake of SVB. We'll see if there's a little bit of a boom there with the FinTech community trying to solve its own problem that way. I do think, of course, that solving that problem, you're still starting in the original situation, right? You're still starting in the original situation. And your point about going to the big banks I think was something that, yeah, we've talked to some founders like, well, now I've got to go to the big banks.
(10:24):
They're not going to want to be as open or understanding about the tech industry as perhaps SVB was. So that's going to be their relationship to their money and everything is going to be different. I spoke to a couple people in venture capital who also said, yeah, there's going to be some impact here. There's going to be a little bit of a, I don't want to say freezing effect necessarily, but as you mentioned at the beginning of our talk, there was already a drawdown or a sort of slowdown in venture capital funding that was feeding these fintechs and InsureTechs and their ability to do things like keep the lights on and get a profitability. And so with that being said, there was a huge boom in InsureTechs going up to about mid 2020 when that started happening. I think in FinTech, the boom had been starting a little bit earlier. I don't know if you would say it was still going that far, but have you thought about or reflected on, or heard anyone reflect on what it's like to be a founder now? Because one of the founders I spoke to said, Hey, if you're a person who can be a CFO for a startup company, you're going to have a zillion job offers now because people are going to bring you in earlier on then they had in the past. I'm wondering if you had talked to anyone about that.
Penny Crosman (11:44):
You're talking about for the startups that are going to end up going out of business, or are you,
Nathan Golia (11:49):
Well, if you're going to start a startup now, you're going to bring in a financial director earlier in the process. Oh, absolutely. As opposed to just being a founder out on your own trying to handle yourself.
Penny Crosman (11:58):
I think any startup that doesn't have a chief financial officer is getting one now. And yes, the financial side, I think a lot of tech startups consider financial stuff to be something to the side. The important thing is the product, customer growth, innovative ideas, executing on those ideas. But I think now the whole financial side of running a business has become much more important for any FinTech startup and for banks themselves, they're having to pay a lot more attention to risk management and head to hedging against their assets because this problem that SVB had where it had a lot of bonds that had lost value because interest rates were rising, that's a problem that is common to many banks. So a lot of banks are having to rethink the way that they manage their assets, the way that they monitor them. I've heard people talk about having more of a risk dashboard so that they could see, here's the likelihood we're going to lose deposits, here's what we can resell our assets for. What are we doing to hedge? If interest rates were to tick up another 25 basis points, what would happen to our portfolio of mortgage backed securities and such? So I think that's across the board. A lot of people are refocusing on financial management and as well as dispersing their accounts across multiple banks, so they're not reliant on one.
Nathan Golia (13:35):
I mean, I can tell you, I've talked to a lot of InsureTech startups over the years where I'll check out their website and they've got, I'm the CEO and there's a product person, a technology officer. You don't see a lot of CFOs, especially of the old companies that have six, seven employees. They might have a business manager who is sort of open and closing accounts, but no one who has that training.
Penny Crosman (13:56):
Yeah.
Nathan Golia (13:57):
Oh, I'm sorry.
Penny Crosman (13:57):
I just want to add something because I feel like we've been a little bit negative about the whole environment, how difficult the environment is and how tough it is to be a startup founder right now. But I do think there are outliers. There's a company called Stellar Fi that is announcing a $15 million round today. They were going to get another 5 million in venture debt from Signature Bank, which went out of business also about a week and a half ago. But I also know of two other FinTech startups that are launching this week with funding in some cases from banks venture capital arms. So it's not like venture funding is dead and we're in a complete drought. There's still investors that are more strategic, more in it for the long haul, less affected by market downturns.
Nathan Golia (14:54):
Have you heard the term flight to quality?
Penny Crosman (14:57):
Yes.
Nathan Golia (14:58):
That's the new buzzword we're hearing, which is
Penny Crosman (15:00):
There's
Nathan Golia (15:00):
A flight to quality. We're going to find the winners or identify the winners and we're going to push everything there. But I think, and I think that's obviously a smart decision. And when it comes to the actual digital transformation of the industries that we talk in, now I've got my banking counterpart here, and as we all know in insurance, everyone loves to say the insurers are so far behind the banks, we're so far behind everyone else. So maybe your perspective is a little different. But from the insurance side, these startups were instrumental and definitely viewed as instrumental in pushing the industry in a direction towards digital transformation. And now of course the question is like, well, if they're sort of bogged down with these financial questions or they're losing money, they're not able to think what's the impact on the digital transformation going forward? And you mentioned banks having their own venture arms that are sort of filling in.
(15:51):
I think we'll see that from insurers as well. We're obviously seeing InsureTechs that are still getting funding and especially the one I spoke to last week or a couple weeks ago called Covey because they were recapitalized, they're able to just like, okay, we can get back to our plan of going towards series A this fall. And I'm really interested in hearing from him about his experience there. I think we're going to start to see that coming down the line. Now, what are the questions that people are asking when they're going in for funding now? What does the flight to quality look like in the conference room? Right,
Penny Crosman (16:28):
Right. Yeah, that's for sure. But as far as the digital transformation, I think that's an interesting question. I mean, I feel like in banking it's, it's very rare that a bank really works directly with an early stage startup. They do sometimes fund early stage startups, but to get a contract with a regulated bank is like an act of God. I mean, it's very, very difficult. You have to jump through lots and lots of GOs with the banks lawyers with a compliance team, with the bank's, regulators. And so banking vendors are kind of an exclusive club in a way. It's very hard to make it into, you have to really, really prove yourself that you have to go through a lot of testing, a lot of proving that you can meet every single regulation that banks have to meet, but
Nathan Golia (17:21):
Touch
Penny Crosman (17:21):
Your software. So I don't see this having an immediate impact on digital transformation projects that are going on today in banks, because a lot of those are with established vendors. I do think that, as you say, a lot of innovation comes out of the early stage startups, which are still in the sort of early incubation phase. And yes, a lot of the bank venture capital arms, the people in those groups are staying the course. At least they tell us they're going to keep funding the young startups that they are interested in and they don't expect to make any change. Where I do see a broader change in the whole idea of digital transformation and financial services is that if this crisis continues and more regulation comes down the pipe, that's going to increase costs across the board. And it also means that technology budget dollars may shift from the exciting the fund projects that are more customer facing over to compliance projects and new risk management software that won't necessarily, you wouldn't necessarily call that a digital transformation.
Nathan Golia (18:36):
Well, we actually had that reflected a little bit in some of the research. You might've actually gotten the same from the digital priorities research that we did earlier this year across brands where I think the number one project was cybersecurity, just something that's like, yeah, it's like we've added all these digital capabilities, now we've got to go back and make sure they're safe, which is kind of interesting. And that predated SBB, I think that what you said about banks not always work with ours, a startups. One of the interesting things about insurance is I think that insurance companies, because insurance is not regulated nationally the same way banking is, it's state by state. And there's been a lot of small pilots that the companies have been able to do with some smaller companies like, oh, I've got this line of business in this state. I can run this pilot.
(19:20):
And then they try and scale it up. And what we were hearing, even again before the SVB collapse at the time when the venture pullback was starting was that the insurance companies were like, yeah, we still want to work with startups, but we want to make sure they have this viable product and have their pilots been successful? Are they in place? And I think that trend was already starting before this. And now as you said, not only do these companies do startups and InsureTechs have to have that sort of meet on the bone, but they also have this background noise of like, are we adequately hedged in a financial, what's the word I want to say? I don't want to say meltdown because it's not quite a meltdown, but it looked like it was headed that way. It was a financial rough seas.
(20:14):
A lot of pressures on innovators. How are we doing on time? Nine minutes. Great, thank you. So I wanted to talk a little bit about in general, see we talked about SVB. This is a big impact on a lot of startups and fintechs and InsureTechs. But as we've mentioned a couple of times, things were changing leading up to that already for the environment. I'm curious about how the FinTech community operates in insurance. For the last several years, there was a lot of focus on community building. There are organizations in cities like Des Moines and Hartford where there's a lot of insurance concentration to bring the startups there, have them work directly so they're not in Silicon Valley while the insurance is being written in Iowa or something like that. Of course, COVID interrupted that sort of flow. And now the community building aspect of being in startups and being among, and the networking and meeting people adding ideas is changing. I'm wondering how that, if you saw something similar happen in FinTech.
Penny Crosman (21:32):
I mean, yes, in the sense that there is less of getting together in person, I would say, although I think that's coming back to some degree, like the Barclays Rise Techstars Accelerator. People have come back to that. So people are coming back to in-person networking. I've seen a lot of startup pitch events
Nathan Golia (21:58):
Happening.
Penny Crosman (21:59):
One thing that I thought was interesting in that weekend after Silicon Valley Bank collapsed was there was a lot of communication over WhatsApp, over texting, over phone calls with founders, talking to each other, with VCs, talking to founders and other VCs. And there was also a lot of communication over Twitter as well, and everybody was sort of watching Twitter. So I feel like that was one of the things that made this bank crisis a little bit different from past ones. And it was also part of why everything happened so fast. I think it was like everyone was just communicating with each other their concerns so quickly, and then they were able to pull their money out so quickly they were able to just go to their mobile banking app and withdraw funds sometimes in small increments, but very quickly and get that settlement within a day or two. So that communication change really was interesting. And I think some people do feel like the VCs communicating SUV's trouble over Twitter was part of what brought the bank down. And that's something you didn't see 20 years ago
Nathan Golia (23:19):
That that was definitely a component that we heard from more than one person about like, well, I can't believe this happened. I didn't even, but from the perspective of one founder I talked to who said, Hey, I was working. I'm a founder. They've got six people. We're trying to stand up our product, we're trying to prep for series A, I don't get a chance to just noodle around on Twitter all day. And then by the time I got to that and heard it was happening, it was over the whole thing and I had missed out. And they were lucky to get the recapitalization when I was talking to the community though. And we've got dig in coming up June 7th and San Francisco two 57th, and we'll have people talking on the for three days. But there's also the accelerator programs, the idea of bringing people together for six weeks of hardcore mentoring and incubation, getting the access, is that coming back in banking in person or is that still virtualized in a lot of ways?
Penny Crosman (24:18):
I believe it's in a lot of cases they are going back to in-person or I think there's still kind of a hybrid situation where some meetings are over zoom, but there is some in-person activity. And definitely as you were saying, for an accelerator, that ability for everybody to be in the same location and have coffee together and have lunch together and go for drinks together, that definitely leads to a lot of collaboration and fresh ideas or smoothing out of mutual problems that people have. Are there any interesting new ideas you're seeing coming out of InsureTech or new capabilities that weren't there before?
Nathan Golia (25:02):
You mean since the collapse here or just in general?
Penny Crosman (25:05):
Yeah, or just recently. Yeah,
Nathan Golia (25:07):
I mean, that's what I was going to say. I was actually about to ask you that question. That's very funny because I was going to say that this is normally the time where I'd say we go to our Q and a, but because we're doing this live, we don't have it today. But if you do send questions, we'll get a chance to review them and get back to you via email or something. But yeah, I definitely heard from some people who were building the sort of, one thing that's been interesting is that you have insurtech for insurance and then you have InsureTech for InsureTech or for startups. And that was something we've seen a lot is that there have been companies that have been working on for startups who didn't have financial directors or CFOs in the same way. They still needed insurance products, risk products, risk management products, and it was hard for them to get it with a small staff or as a founder.
(26:00):
And we did hear from, for example, someone who does a online insurance brokerage for director's, officer's insurance, here's why you should use our products because you never know something. This is going to happen and you're going to need it. And it's really just saying with something like this, any sort of crisis related to risk, which is what this really was, insurance and InsureTechs are always there to say, here's why I was building this product in the first place. And I think that's sort of similar to what you saw with Brex and Mercury that they were like, Hey, we're always here doing this. You could have been doing it in the first place.
Penny Crosman (26:34):
Yeah, yeah. They definitely promoted the fact that they were getting all of these Silicon Valley bank clients for sure. So yeah, I think there is opportunity. There's certainly opportunity for companies that do data analytics, that do risk management dashboards of some kind that offer. There are a lot of companies that offer sort of a software alternative to a chief financial officer where it's like all the software that you would need to manage your financial risk. And yeah, there's still opportunity, I think for any startup that has a clear plan to get to profitability, like Stellar Fi, which launched around today, they've got a subscription model where people pay five or $10 a month. That's something where they don't have to rely on interchange fee income, which is what so many startups in the FinTech world do. So there's still opportunity and there's especially opportunity for people who, fintechs that help people with financial health and dealing with that problem of living paycheck to paycheck. I think there's still a lot of greenfield in that area.
Nathan Golia (27:52):
Well, I think yeah, a wrap up. Cause they're giving us the one minute side. Yeah, that's the thing. Definitely don't think anything us saying that this is the end of the FinTech era because it's definitely not. What we're saying is that if you're going to be a startup now you've got a lot of considerations that are maybe you weren't expecting to have to deal with as a startup founder. And you get those ducks in a row and you present yourself to the industry. There's still a lot of opportunity. There's still a lot of appetite. Digital transformation across banking, insurance. Penny, thank you for joining me today. Thank you everyone out there.
