Yahoo Finance Silicon Valley Bank's collapse is already triggering changes in the startup world
Venture capitalists and startups breathed a sigh of relief on Sunday when the FDIC announced it would backstop all Silicon Valley Bank deposits. But the industry won't be able to just walk away from this mess now that depositors will be made whole.
When SVB collapsed last Friday, it kicked off the biggest banking crisis since 2008 and rattled the tech sector that it had served for about 40 years. The loss of SVB will be felt for a long time in myriad ways across tech.
For one thing, the impact will be especially hard on diverse founders, people of color, and women looking to build their businesses who found a willing, and sometimes sole, partner in Silicon Valley Bank.
"Only SVB was there for most of the underrepresented founders I know and work with," said Mendoza Ventures Partner Asya Bradley. "For under-represented founders, they often can't get accounts at the top four banks, so the community of Black and Brown founders has been reeling, 'What are we going to do?'"
Data shows that founders of color are far less likely to receive VC funding and small business loans. For example, in 2022, Black founders raised just 1% of all venture funding, according to Crunchbase data. Additionally, Black business owners struggle to access bank loans at the same rates as white counterparts – and the collapse of SVB could create an even more profound gap.
"It's a really big blow to diversity in the ecosystem," Bradley added.
'Standard operating procedure' changed forever?
Bradley, who's also an angel investor, still believes in regional banks as an avenue for founders. However, that's about to get more complicated. As companies and VCs have been sorting through the wreckage of this weekend, they're returning to operations, in many ways, completely changed.
Nate Wyne, co-founder and CEO of ESG and sustainability data startup Floodlight, is a former SVB employee whose financial life was inextricably connected to the bank. Floodlight's primary deposit relationship was with SVB, as was his mortgage and family's savings account.
“The centerpiece of the entire tech economy has fallen apart in the last 36 hours,” he said on Friday. “I know so many people who broke their backs to raise in this environment, and some of them put every cent with SVB."
By Monday, Wyne was able to access his funds at SVB, but it wasn't an easy process. Though he was able to log in to his SVB account, Wyne had to rush to wire money to a new bank, in time for Floodlight to make Wednesday's payroll. He's already changing how Floodlight distributes its assets and codifying those changes imminently – Floodlight's already adopted a new board resolution requiring the company to have its assets spread between two banks at all times.
This is exactly the sort of diversification that VCs will be actively looking for from here on out. Brian Gong, a VC at Cameron Ventures, told Yahoo Finance that the collapse of SVB has altered how he and his firm do due diligence.
"The additional line item in our due diligence is now, 'Where do you store your cash? What banking partners are you using? How are you spreading your assets?" he said.
Amit Pandhi, CEO of Velocity Snack Brands and Popchips – both of which were backed by VMG Partners until their sale in 2022 – said that the companies he's worked with are all moving their money quickly.
"The portfolio companies I work with are shifting funds, even if they're with First Republic – they've instead been flowing into the banks that are 'too big to fail,'" said Pandhi. "I was just talking to one founder who just opened accounts with both Bank of America and Chase."
In other words: for a startup, it may be hard to take what increasingly feels like a substantial risk on a regional bank.
“We don’t know where the backstopping stops,” said Pandhi. “If your money is frozen for a period of time, it’s hard for startups and small companies to operate, there’s just so little margin for error.”
Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks and on LinkedIn.
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