A view of Silicon Valley Bank’s headquarters in Santa Clara, California after the federal government intervened following the bank’s collapse on March 13, 2023.
Nikolas Liepins | Anadolu Agency | Getty Images
Silicon Valley Bank was the go-to place for startups looking for bankers who understood startup life and balance sheets. That was especially true for the cohort of startups that were built and scaled to combat climate change.
After a very stressful weekend for many startup founders and investors, banking regulators have come up with a plan to safeguard SVB deposits and ensure depositors don’t lose their money.
Founded in 1983 specifically to support start-ups, SVB had a strong and established climate business with 1,550 climate technology and sustainability clients, according to its website.
“Silicon Valley Bank had a very strong reputation in the energy transition space and, unlike many of its peers, was willing to gamble its money,” said Mona Dajani, head of renewable energy and infrastructure law at Shearman and Sterling.
“Many clean energy companies turned to SVB because they had an established and committed clean energy practice and were credited with more clean energy experience than most regional and large competitors,” Dajani told CNBC.
But the climate space has grown since SVB launched, and that paves the way for new lenders to service the market.
“Basically, the companies that are coming out of the climate right now have real strength. These are fundamental businesses and people will want to lend them credit because it’s a good deal,” said Katie Rae, CEO of The Engine, an accelerator and venture fund focused on hard tech, including climate startups.
“In the last three days alone I’ve probably had 50 emails in my inbox from different vendors saying, ‘Hey, I know SVB isn’t doing well. We do venture debt too.’ There will be so many,” Rae said in a call to CNBC on Tuesday.
Wind turbines run at a wind farm, a key source of energy for the Coachella Valley, near Whitewater, California on February 22, 2023.
Mario Tama | Getty Images
Understand how startups work
Venture-backed startups are an unusual type of company. In their early stages, they may not have cash flow, revenue, or even customers. Instead, they rely on venture funding, in which investors offer cash for equity in hopes the startups will prove their technology, find customers, and eventually grow into giants.
Providing banking services to these types of clients requires special skills and a willingness to take risks.
“No one understands startups and how to lend to startups like Silicon Valley Bank,” said Zachary Bogue, a longtime tech investor and co-founder of DCVC.
“I envision a startup’s application being crushed by a big bank’s risk committee,” Bogue told CNBC.
That was exactly Bill Clerico’s experience in May 2009. When Clerico moved to Silicon Valley with Rich Aberman to grow their fintech company WePay, they had a Bank of America small business account, but the account didn’t have the services that the startup needed .
“Silicon Valley Bank understood that even though we only had about $10,000 in deposits at the time, we had a lot of potential,” Clerico told CNBC.
As it turned out, the SVB had rightly backed Clerico. WePay was acquired by JPMorgan Chase in December 2017.
“This early investment in our relationship paid off,” Clerico told CNBC. “Over time, our deposits grew to hundreds of millions, we’ve loaned millions of them into venture debt, and we’ve liquidated billions through their accounts.”
In January 2022, Clerico launched Convective Capital, a $35 million venture capital fund investing in wildfire technology. He really hopes that someone can fill the void left by the SVB.
“Some people might confuse their balance sheet meltdown with the failure of this startup-centric business model — but actually, I think banking startups continue to be a great business and a role that someone needs to fill,” Clerico told CNBC. (Notably, Clerico is an angel investor in Mercury, a startup working to fill that need.)
“I hope that the SVB and its business model will remain in some form,” said Clerico.
The ‘1,000 pound gorilla’ of bad debt
In the climate technology ecosystem, SVB has been a particular leader in lending to companies with venture capital funding, known as “venture debt”. It’s important for startups that still aren’t generating enough cash flow to sustain themselves, especially if they’re between rounds of funding.
“It adds a little bit to the capital they’ve raised, lengthens their runway a little bit, and gives them more time to move forward with their business,” Rae told CNBC. Venture debt can add three to six months to pre-existing runway companies, Rae said.
“There are other places that do venture debt, but Silicon Valley Bank was the £1,000 gorilla in the room,” said Ami Kassar, the CEO of corporate lending advisor Multifunding.
“The concern now is that even in cases where deposits are made in full, the credit facilities for companies with SVB are likely to become unavailable and this is a sector where these are critical,” Dajani said.
However, lending to venture-backed companies is a riskier proposition than traditional banking, Kassar told CNBC.
“I’ve always wondered how they managed to get regulators to allow them to have such a high concentration of venture capital,” Kassar said.
Solar panels are placed at the University of California, Merced Solar Farm in Merced, California August 17, 2022.
Nathan Frandino | Reuters
Climate is good business
SVB was an early supporter of climate technology and helped many climate technology companies get started. However, as the sector matures, participants believe that other financiers will be more willing to lend to these companies.
“Silicon Valley Bank’s early support and commitment to supporting climate technology startups has certainly helped catalyze the tremendous capital migration that you are now seeing in this sector,” said Adam Braun, one of the founders of climate startup Climate Club , to CNBC.
For example, SVB funded 60% of community solar projects, said Kiran Bhatraju, CEO of Arcadia, a climate technology company that helps people connect to community solar projects, among many services.
In that regard, the bank was “a climate bank pioneer,” said Steph Speirs, co-founder and CEO of Solstice Power Technologies, which has developed technology to connect people to community solar projects.
“But renewable energy has come a long way in the last decade, and there’s now a much broader universe of potential financiers looking to get on board,” Speirs said.
Braun expects the same.
“I think we’re going to see many more institutions building dedicated climate change practices and funds to support startups that are emerging in this space,” Braun told CNBC. “While SVB may have been a trailblazer, I don’t think the events of the past week will lessen a desire to fund and support the burgeoning companies driving the fast-growing climate technology sector.”
First Republic and JPMorgan are “increasingly making this category a priority,” Chauncy Hamilton, a partner at venture capital firm XYZ, told CNBC. “More and more banks are paying attention to the climate,” said Hamilton.
Mark Casady, a founder of venture capital firm Vestigo Ventures, agrees.
“Climate solutions are too powerful a force to be stopped by a bank failure,” Casady told CNBC. “The need is critical and time is not on our side to find solutions. As this is a fundamental need it will receive more support rather than less.”
However, this transition will take some time. And for companies fighting global warming, time is the ultimate enemy.
“I expect that eventually the big banks will step in and provide the financing the industry needs to move forward – these projects are just too attractive and the promise of climate technology is too big. But it will take time and delays can be costly in the fight against climate change,” Bhatraju told CNBC.
“With all the new investments in climate technology and the opportunities that the IRA offers [Inflation Reduction Act], there’s a lot of momentum. We don’t want to lose that,” said Bhatraju.