HomeTechMortgages, Wine and Renovations: Silicon Valley Bank's Deep Tech Ties

Mortgages, Wine and Renovations: Silicon Valley Bank’s Deep Tech Ties

When Kleiner Perkins, one of Silicon Valley’s highest-profile venture capital firms, wanted to build a bridge between two of its office buildings around 2005, it decided to take out a loan. became Silicon Valley Bankjust 43 feet away on Sand Hill Road in the heart of the venture industry in Menlo Park, California.

To make the loan work for Kleiner’s project, which cost more than $500,000, SVB agreed to lend the money against the value of the fees the venture firm was willing to earn on its funds, four people with knowledge of the situation said.

SVB also provided personal banking services to many of Kleiner’s top partners, the people said. That was on top of the banking services and venture debt that SVB provided to many of Kleiner’s startups, as well as mortgages for the founders of those companies. SVB even invested in Kleiner’s funds, two people said.

And when SVB held an annual event in January on the state of the wine industry, it featured speakers from Wine.com, one of the world’s largest online wine retailers and a company Kleiner had once invested in.

Before SVB failed last week and sparked a global financial panic, it was known primarily as a low-profile regional bank. But within the ecosystem of technology, the bank had molded itself to the quirks and idiosyncrasies of the industry, becoming deeply integrated to an unusual degree into the lives and businesses of investors, entrepreneurs, and executives.

For 40 years, the institution has dealt with the fact that high-growth, high-risk tech startups and their backers fail to adhere to normal business practices. These companies prioritize breakneck growth, change strategies frequently, and celebrate failure. They are often worth billions before turning a profit, and can go from silly idea to giant with astonishing speed. Most importantly, they rely on a tight network of money, workers, founders, and service providers to function.

That unique and often irrational reality required a specialized bank.

“There were a lot of ways that Silicon Valley Bank was intertwined with the lives of people in Silicon Valley that were unique,” ​​said Anat Admati, a finance professor at Stanford. “The bank had relationships and built relationships with people from all over Silicon Valley. It was a gathering point.”

This week SVB, which was taken over last Friday by the Federal Deposit Insurance Corporation, tried to pick up the pieces of its collapse. On Monday, he held a call with investors to tell them that he had reopened his operations, even when he was looking for a buyer.

Mark Suster, an Upfront Ventures investor who was on the call, said both he and his company were clients of the bank. SVB also co-sponsored a conference recently organized by Mr. Suster’s company and, after the implosion, Upfront Ventures backed a lettersigned jointly by a group of firms, encouraging the founders to keep or return 50 percent of their total capital to the bank.

“They understand that you will have cash in several banks, they would like to be one of them”, Mr. Suster wrote to startup founders on Twitter.

An FDIC spokesman did not respond to a request for comment.

SVB was best known for courting risky young companies that other banks wouldn’t do. But its tentacles went much further.

The bank lent cash to many top venture capital firms, including Andreessen Horowitz. From his own $9.5 billion fund, he invested in startups, including OpenDoor, a home-buying company, and Chainalysis, a cryptocurrency research startup, as well as venture capital funds, including Sequoia Capital. It incubated some fintech companies that were building investor tools for start-ups. And it pleased the tech industry, sponsoring ski trips, conferences, industry newsletters and fancy dinners.

It was all part of the virtuous circle that makes the tech industry tick, investors and founders said. Whenever a start-up wanted a loan, the bank would talk to its backers, said Samir Kaji, who worked at SVB in the 1990s and is now chief executive of Allocate, a technology platform for managing venture investments.

“There were constant touch points with investors,” he said. “Everyone knows each other.”

As Silicon Valley’s start-up industry flourished, SVB expanded its services and helped manage the outsized wealth the industry produced. That included providing lower-interest mortgages to founders that other banks wouldn’t lend to. Many entrepreneurs are worth millions on paper but have little cash in their bank accounts.

SVB has also expanded into tech-adjacent industries, such as wineries in the Napa and Sonoma Valleys, where many founders and tech executives spend their weekends. Last year, the bank lent $1.2 billion to wine producers.

Gavin Newsom, Governor of California, who praised the rescue of SVB last week, it received loans for three of its wineries from SVB, according to the bank’s website.

The domain of SVB was well known in Y combiner, a startup incubator. Dozens of tech founders who participated in Y Combinator last year were told to open bank accounts at SVB, and were introduced to SVB bankers at Y Combinator events, three people who participated in the 2022 class of entrepreneurs said. Y Combinator tech shows over the summer.

One described a cocktail hour meeting where he was introduced to an SVB banker who could provide a loan for his startup once he graduated from the Y Combinator program. Six months later, when he needed a loan to buy his first house, he turned to SVB. The bank looked at the valuation of his company, based on the money it had raised in its first round of financing, and talked to investors in his company. He made a loan after two other banks turned it down, he said.

SVB’s home loans were significantly better than those from traditional banks, said four people who received them. Loans were from $2.5 million to $6 million, with interest rates below 2.6 percent. Other banks had turned them down or, when given interest rate quotes, offered more than 3 percent, the people said.

Drive Capital, a venture firm in Columbus, Ohio, worked with SVB and had lines of credit with the bank that allowed it to transfer money to its startups faster than asking its own backers to wire the money for each individual deal. SVB also invested in Drive Capital’s first fund and two of its portfolio companies. In total, a third of Drive Capital’s portfolio used SVB’s banking services, which included venture debt, a specialized type of credit for venture capital-backed start-ups.

“Whether you’re a venture capitalist or a startup, it’s fair to say that in some way, shape, or form, SVB touched every part of your business,” said Chris Olsen, an investor at Drive Capital.

Sequoia Capital, a major venture firm that backed Airbnb, Apple and Zoom, always recommended its startups open an account with SVB, Sequoia partner Mike Moritz wrote in a paper. Financial Times opinion piece. Stripewhich is one of the most valuable private tech startups and counts Sequoia as its largest shareholder, used SVB for a product that allows international startups to form companies in the United States, he noted.

Last week, the partners at Andreessen Horowitz sent a letter to their investors to allay concerns about SVB’s collapse, according to a copy of the memo reviewed by The New York Times. About half of the company’s startups had banking relationships with SVB, according to the memo. The firm also had an outstanding loan of about $16 million from the bank for “tenant improvements,” or renovations to the firm’s offices.

Marc Andreessen, one of the founders of Andreessen Horowitz, called hedge funds and some of the world’s biggest banks to help find a buyer for SVB last week, two people with knowledge of the calls said. Scott Kupor, another Andreessen Horowitz partner, handled panicked portfolio companies and questions from the company’s investors.

A spokeswoman for Andreessen Horowitz declined to comment.

Matt Mireles, a start-up founder, was introduced to SVB when the bank invited him to their box at the San Francisco Giants Stadium in 2010. Ten years later, he struggled to get a mortgage because his start-up, Oasis, a artificial intelligence company that had raised more than $8 million in funding, was not profitable. He began to think that the only way he could have a house was if he worked for a big tech company.

But SVB analyzed Mr. Mireles’ venture financing and investor list and offered him a reasonable mortgage with a 20 percent down payment.

“That’s one of the interesting things about Silicon Valley: the bank and the place,” he said. “These institutions made the entrepreneurial lifestyle, where it might take two or three failures to get to a certain level of success, made it viable for people.”

Last week, SVB’s greatest strength, its interconnected customer community, became a double-edged sword. When venture capitalists began to worry about the financial solvency of the bank, that quickly caused panic throughout the start-up world.

That Thursday, SVB hosted a dinner party at the South by Southwest tech festival in Austin, Texas, serving grilled salmon and filet mignon to a group of investors and startup founders at Perry’s Steakhouse.

As anxiety about the bank’s future spread through group chats, emails and social media, attendees began referring to the party as “the last supper.”

Jake Chapman, a Marque Ventures investor who attended the dinner, said he had called the host aside to ask about the brewing crash and had been turned away. “She just said the balance sheet was strong,” he said.

The next morning, SVB customers had tried to transfer $42 billion in deposits from the bank, prompting the FDIC to shut it down.

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