Ok so like one of the reasons you as an entrepreneur go with a bank like SVB is the ability to borrow money against your next fundraise. Aka, secure venture debt
Most banks don’t want to lend money to businesses that are just rapidly setting it on fire with no profitability in sight, but the idea of venture debt (and to some extent I guess the personal loans SVB makes to founders, although I have no experience with that) is that the money is secured against your ability to fundraise a future round and pay it back (or in rare cases reach a profitability/IPO milestone).
Part of the diligence is looking at the fundamentals of the business and “can you reach that next milestone for fundraise”, but it’s also hugely relationship driven. The bank is also looking at things like your VC partners, who not only have implicitly ‘vouched’ for you In that they put money in your company, but also now have some incentive to see you (and their investment) succeed. Part of the reason a bank like SVB is willing to make a risky bet loaning money is their outstanding partnerships with the Sequoia’s and Andreesens of the world: in that they have worked with these venture firms and their backed companies for years and made money with them.
Therefore, a company backed by a brand name venture firm that has worked with SVB for years is gonna have a better experience raising good terms venture debt than a co that has raised 10m from “No Name Or Track Record Fund”. Additionally, if “Bad Ventures” venture firm’s portfolio is constantly defaulting on the loans that SVBs provides them because the companies can’t fundraise and/or die, SVB probably isn’t gonna continue to offer money to “Bad Venture” portfolio companies [or at least not without higher levels of scrutiny/less attractive rates].
This is all a roundabout way of saying that the venture firm’s track record and relationship with the bank matters.
So here’s my question-
If part of the risk calculation for an SVB to offer venture debt is the promise of these venture firms to be good partners, what signal has this bank run sent to other SVB-like venture lenders?
To me, I’d be *very* hesitant on trusting VC partnerships in the future as part of my risk calculus. The root causes of the SVB collapse seem to be multi-dimensional, but certainly part of it was the run triggered by panicking VCs telling their companies to abandon ship.
This might be a purely psychological thing, but if I’m an SVB counting on these VC firms as long term *partners* along for the ride to make money, I'd reconsider that, big time. These supposed partners have proven to act in ways that are intensely hostile to my business.
And I wonder if that is going to tighten up the venture debt market, by like, a lot.
mhoye
Pete Cheslock 🥩
David Golumbia