A remnant of the failed Silicon Valley Bank is trying to reclaim some of its old turf in
HSBC, Stifel, JPMorgan Chase and other traditional lenders — along with fintechs that service startups like
Now, First Citizens BancShares, which obtained parts of SVB in a failed-bank deal, is aiming to lure back old clients back and rebuild its venture-debt practice while using the old Silicon Valley Bank brand.
To be sure, macroeconomic factors and the banking crisis in the spring have stifled the business of venture-debt loans, in which financial institutions extend nondilutive lines of capital to young companies in exchange for payments including warrants than can convert to equity.
In the first half of 2023, loans for angel-backed and seed-stage companies dropped 44% from the previous year, and loans for early-stage companies dipped 45%, according to Pitchbook.
Kyle Stanford, lead venture capital analyst for data company Pitchbook, said the slowdown began even before the failure of Silicon Valley Bank as venture fundraising tightened amid economic uncertainty. Yet the new competition will make the venture-debt market healthier, he said.
"I wouldn't imagine there's many more banks that are going to jump into it," Stanford said. "Down the road, when interest rates are down and debt is just flying around, we'll see more banks, but not right now. …[But] seeing large players build out venture-debt lending or some sort of exposure to VC tells us that everyone expects VC to come back and be a very large market at some point."
The funding, riskier due to the volatile nature of the startup world, can offer financial institutions benefits beyond the immediate transaction. Startups are often required to keep a majority of their funds and financial activities with the lender, and to give lenders access to warrants, or the right to co-invest in the next equity round, in the companies.
Marc Cadieux, president of the new Silicon Valley Bank commercial banking business, said that the bank's broader understanding of startups' needs makes it more appealing.
"We were the market leader," Cadieux said. "We dominated the space in terms of being able to see and get the right deals. …The competition is really nothing new. At the same time, we continue to believe that we have the best value proposition of, not just providing the debt, but then what happens next."
The bank has also made a few changes to its terms since its failure. For example, the old Silicon Valley Bank used to require most
"I'm all about being more market-friendly right now, as we earn back the confidence and trust of our innovation-economy clients that we value so dearly," Cadieux said.
The bank is also requiring that applicants have more equity on-hand, Cadieux said. While Silicon Valley Bank previously sought 12 months of runway, now startups should have about 18 months of funding apart from venture-debt loans.
Cadieux added that although it's more difficult for startups right now to meet the requirements for credit, the bank's venture-debt growth will eventually return to its prefailure levels once the market normalizes.. He added that early-stage capital is "critical" to the bank's value proposition and client acquisition.
"Proportionately, [venture-debt book] will continue to get smaller, which I think will be one of several enablers that keeps us willing to be in that business willing to take the risks," Cadieux said. "If we stake out incumbency at the earliest stages, generally speaking, we do a really good job of retaining that client throughout their journey. If we miss the opportunity for incumbency, it's harder to get that client back from whoever won it."
HSBC is one of the larger banks edging in on startup business. The global company brought on
"Our intent is to become the market leader," said Sabow, now head of HSBC's innovation banking in the U.S. "We want to become the No. 1 partner to the global innovation ecosystem."
Sabow said HSBC's venture-debt business isn't about closing deals but is part of the bank's long-term strategy to serve startups. He added that he thinks competition in the venture-debt market, and the startup ecosystem, means there are more actors to support innovation.
"There used to be a very predictable market leader where you knew how things were going to play out, from a partnership standpoint, if things went off track with a company, which oftentimes they do when you're building a high-growth innovation company," Sabow said. "The fact that we've got people with such experience that have been through a number of cycles … is an important asset for us, but also an important asset for our clients and their board members."
Pitchbook's Stanford said that smaller fintechs getting into the venture-debt market have a distinct perspective of what startups and founders need, and can potentially service those small businesses better than banks have in the past.
Arc, a fintech that offers startup-focused products, began offering venture debt last month, after seeing a gap in the market, said co-founder and CEO Don Muir. Muir added that the software company uses application programming interfaces to connect to clients' banking, billing and accounting information and can turn around venture debt decisions and term sheets in 48 hours via its app.
"The venture debt side is the unspoken story of the regional bank crisis," Muir said. "So we had customer after customer, companies that moved over from Silicon Valley Bank, asking us, 'Can you refinance our venture-debt loan? Can you help us access capital?'"
Immad Akhund, founder and CEO of the fintech Mercury, said the decrease in Series A and Series B funding rounds has directly decreased the amount of venture-debt deals since that equity is often a requirement for the credit. Akhund said Mercury generally requires customers to have raised at least $5 million in the last three to six months, and preferably be producing revenue, which is tougher for startups in the current environment.
Akhund also said he's skeptical of big banks' commitments to building out venture-debt capabilities, even those that hired ex-Silicon Valley Bank talent. Mercury, which took on 26,000 new customers from March to June, has offered venture debt since early last year.
"Big banks are not good at lending to small companies," Akhund said. "[Venture debt] is a riskier product. SVB did it for a long time and built out the models and the experience with it. …The startup ecosystem has stuff happen. Some companies fail, and0 it's not very easy for a big bank to understand."
The venture-debt market is shifting, as activity calms down and more players jump into the ring, but Stanford said it's not one of the main drivers of the startup business. The equity side of the market, like venture capital fundraising, has a bigger role in early-stage success.
