ImpactAlpha, March 13 – At the end of a nervous weekend, disaster was averted for Silicon Valley’s ecosystem of climate tech, health tech and other startup companies and venture capital funds.
With the federal government stepping in to assure access to their deposits in Silicon Valley Bank, tens of thousands of companies should be able to make payroll and pay other bills this week.
“Startup innovation in America is saved!” BlocPower’s Donnel Baird tweeted after the emergency measures were announced late Sunday. Baird and others had warned that the bank’s meltdown had threatened to set the thriving climate tech ecosystem back by a decade or more.
If Thursday’s run on the bank and Friday’s seizure by state and federal regulators had exposed systemic risks in the banking system, the weekend’s mobilization highlighted the resilience and ingenuity of a distributed network of lenders, fund managers, advocates and other intermediaries.
Caroline Bressan of Open Road Alliance, which specializes in bridge loans to get social enterprises through rough patches, fielded calls from frantic founders and fund managers all weekend. Open Road was prepared to provide bridge loans against receivership certificates issued by the FDIC.
Open Road was among a handful of initiatives ready to raise philanthropic and other capital for dedicated relief funds for founders and funds, had the Treasury and Federal Reserve not stepped in. Others included Prime Coalition, Enduring Planet and Brex.
“The longer term effect of losing that impact capital at a time when fundraising was already growing more difficult would slow progress significantly towards our dual goals of limiting climate change and reducing inequality,” Bressan told ImpactAlpha.
The bank’s collapse threatened to take the wind out of climate tech, which has been one of the fastest growing and more resilient tech sectors. SVB was a leading provider of venture debt, or loans to pre-revenue startups based on their ability to raise equity rather than cash flow. Its covenants required borrowers to bank almost exclusively with SVB.
“There was no other bank, regional or national, that was as deeply involved or as good a partner as Silicon Valley Bank,” said Todd Johnson, interim CEO of Activate, the fellowship network of scientists spun out of the U.S. national laboratories. Activate has graduated 142 fellows who have formed 106 companies that have raised $1.3 billion in follow-on funding – and held a significant portion of their funding at Silicon Valley Bank.
“All of our allies in venture, in startups, in climate, were also heavily working with Silicon Valley Bank in one way or another,” said Johnson, who also is on ImpactAlpha’s board of directors.
The crisis brought together stakeholders of varying viewpoints around the imperative to bail out depositors – but not investors in the bank, who will most likely be washed out. Treasury Secretary Janet Yellen said the resolution by the Federal Deposit Insurance Corporation would not involve taxpayer money. The same protections were extended to New York’s Signature Bank, a crypto-heavy lender that was closed by state officials on Sunday.
Federal officials have not yet found a buyer for Silicon Valley Bank’s assets, including its loan book of venture debt and renewable energy project finance.
“I am not a fan of VCs. And I am not a fan of government bailouts. But climate tech and the fight against the climate crisis does not exist in a vacuum,” BlocPower’sBaird told ImpactAlpha. “If the Silicon Valley innovation ecosystem collapses, then climate tech, and the last ditch hope for saving the planet it represents, will sink and become far more difficult and challenging to navigate.”
SVB’s collapse was “an extinction level event for startups and will set startups and innovation back by 10 years or more,” tweeted Y Combinator’s Garry Tan on Friday after regulators took control of the bank. Almost a third of the accelerator’s portfolio companies affected by the shutdown are unable to make payroll over the next 30 days, he said.
The bank also served diverse, emerging fund managers, including Harlem Capital Partners, which raised $134 million for its second fund in 2021.
“What was put at risk is an entire generation of innovation. We are just starting to make progress getting financing to minority entrepreneurs,” says Shu Dar Yao of advisory firm Lucid Capitalism.
The bank drama, sparked by the bank’s announcement Wednesday that it was trying to raise additional cash, was another upheaval for the battered tech sector, which has absorbed the crypto crash, a sharp falloff in venture funding and public offerings, mass layoffs and other headwinds.
“At some point it would be really nice if those of us trying to run companies could go a solid 12 months without a once-in-a-generation black-swan macroeconomic event,” tweeted Austen Allred of Bloom Institute of Technology, a workforce-upskilling startup in San Francisco.
The epicenter of the earthquake was Silicon Valley but the shock waves rumbled around the world. More than 100 startups in the U.K. parked their cash with Silicon Valley Bank’s British subsidiary, which the Bank of England put into insolvency on Friday. The craft marketplace Etsy delayed payments to some sellers, because one of its payment processors held funds at the bank. Still unsettled: a $3 billion SVB joint venture with China’s Shanghai Pudong Development Bank.
“Being originally from Argentina, I’ve seen my fair share of bank runs and systemic risks playing out, but I never imagined I’d see something like this here,” wrote Diego Saez Gil of Pachama, a startup that uses carbon credits and remote monitoring to protect forests.
The San Francisco-based company, backed by Y Combinator, Breakthrough Energy Ventures, LowerCarbon Capital and the Amazon Climate Pledge Fund, is one of scores of climate tech startups with funds trapped in SVB.
SBV’s failure jeopardized companies like Localized, which partners with universities and corporations and tech giants to help graduates in emerging markets secure good jobs as a means to combat youth unemployment.
“We are just hitting our stride and have some fantastic success stories with both our university and employer partners,” founder Ronit Avni told ImpactAlpha.
The Washington, D.C.-based company feared it would not be able to meet its immediate financial obligations, like paying employees and invoices. That uncertainty was eased by Sunday’s announcement. But the effects on startups are likely to linger.
“Founders are concerned that in an already erratic investment environment, this could further impact investors’ ability to deploy capital in the near-term,” says Avni. “We’re feeling upbeat about our trajectory, but a lot of companies won’t be able to make it that long.”
The post-mortem on the episode will include inevitable crowing from proponents of Web3 and De-Fi (for decentralized finance) about the advantages of distributed systems built on blockchain and other technologies. Skeptics will point to recent crashes of crypto ventures, including Signature Bank and Silvergate and November’s spectacular collapse of FTX.
The weekend fire drill did showcase the ingenuity and community spirit of the impact investing and broader startup funding ecosystem. On Sunday, Cathy Clark at Duke University’s Fuqua School of Business and Stockbridge Advisors’ Mark Newburg quickly curated dozens of lenders stepping up to support SVB customers and efforts to stand up dedicated relief funds for startups and fund managers impacted by the collapse.
“Impact investors were very willing to work with founders that needed help over the weekend. It left me feeling heartened about the community we’ve built,” said Lucid’s Yao. The vast majority of founders within the impact community would have found bridge funding and other relief resources if needed, she said. “A lot of this machinery has been really well developed by our field already.”
The bank financed more than 60% of community solar project, according to it website. Its loan book includes more than $3 billion for renewable energy, battery storage and other projects. As of press time, no buyer had emerged for the bank’s venture debt portfolio or other assets.
Solar installer Sunrun’s stock was pummeled after last week’s bank run. Sunrun said Silicon Valley Bank was a lender in two of its credit facilities. Sunrun said the facilities accounted for less than 15% of its total hedging facilities.
“Our view is that there is still sufficient capital available and willing to fund solar projects,” said Omar Blayton, CFO of New York-based Sunwealth. Lenders like Sunwealth might see increased dealflow, he said, and expected no slowdown in the pace of solar installations, particularly in the low-income and small-commercial markets where Sunwealth is focused.
Under a community benefit agreement created last year, SVB committed $11 billion for loans and investments in small business, community development, affordable housing, and charitable giving through 2026.
Paulina Gonzalez-Brito of the California Reinvestment Coalition, which negotiated the agreement, said regulators should make the terms of the community benefit commitments a condition of any purchase. Absent an order from regulators, the agreement won’t transfer to a new owner.
“There is concern about the depositors, and rightfully so, but there needs to be an equal priority of this commitment to communities,” Gonzalez-Brito said. Silicon Valley Bank sought the agreement to speed the approval of its 2021 acquisition of wealth manager Boston Private Bank & Trust.
“Working class, low-income – that wasn’t their clientele,” Gonzalez-Brito said. Silicon Valley Bank presented its first-year progress in a slide deck earlier this year.
“We were very excited for Black, Latino and Asian home buyers to get access to this product,” Gonzalez-Brito said. “We thought they were on track for Year One, that they were making pretty good progress, and that they would meet their goals.”