Silicon Valley Bank, which rapidly failed last Friday, didn’t just have billions in deposits in its coffers—it was also a big lender to the startup community.
Now the issue of venture debt is front and center as startups grapple with what will happen to the existing loans they had with SVB. Venture debt, a type of loan designed for fast-growing startups, has recently grown in popularity as it’s often the companion of equity funding but is much less dilutive to startup shares. Though it comes with its own structures to consider, high-growth and high-cash-burn startups have tapped venture debt for a variety of reasons, in many cases to bolster their financial position or avoid a down round as equity markets have grown chillier in the past year and the economic outlook remains murky. The venture debt question is important for companies because “it impacts that liquidity and runway of a certain category of startups,” Arjun Kapur, founder and managing partner of Comcast’s Forecast Labs, told Fortune.
Some startup founders that took loans from SVB are now wondering what happens to that debt if SVB or its loan book is acquired. Meanwhile some venture capital investors wonder where startups will be able to get such good terms, as SVB was known for providing more attractive loans compared with other lenders. The new bridge bank, Silicon Valley Bridge Bank, N.A., and its new CEO, Tim Mayopoulos, said on Tuesday that they are “open for business,” including with their loans. On a private Zoom call on Wednesday, attended by Fortune, Mayopoulos said the bridge bank is “honoring all of our existing loan arrangements and facilities,” and currently “making advances” on those facilities as well as “taking new applications for loans.”
But ask founders and you’ll hear that “they don’t know what to do,” one venture investor said of their portfolio companies, adding that roughly 80% of their portfolio had loans with SVB. “I think everybody’s now waiting…on a knife’s edge to figure out who buys the bank and who buys the venture debt.” They noted that the waiting is now with “a positive inclination.”
Key to understanding SVB’s popularity in the VC space is the way it approached a certain type of company: those higher-risk startups. “Many of these companies may be burning $1 million, $2 million, $3 million a month, right? So they have a very different risk profile, and not every bank would want all of that business,” Kapur said. He described SVB as a “friendly bank” for the startup community.
One founder who spoke with Fortune on the condition of anonymity said: “It made no financial sense to go with anybody other than SVB, for sure” for their venture debt. This startup got an $8 million loan in total with certain parameters for drawing on it, at a 4% interest rate in late 2021, and said the next best interest rate they were offered while shopping around for their loan was 13%. “It was not even, like, a little bit better. It was way better.” They said they are wondering, as others are, about who is going to buy SVB, and “when they get bought, what happens to all the debt? Like, will it be called? And will the culture change overnight? Will the brand be dissolved?”
To reassure clients of the bank, CEO Mayopoulos has been asking those who had withdrawn funds to consider moving them back into the bank, citing the Federal Deposit Insurance Corporation (FDIC)’s full backing of deposits. Many startups had covenants with SVB for their venture debt that required them to hold the vast majority of their deposits in the bank. The founder who spoke with Fortune on Wednesday said they’re hearing “guidance to be extra careful to ensure that you’re not in breach of any covenants for any period of time,” and that they’re “looking out for any ‘gotcha’ moments.”
Even so, the founder said, “I’m still ride or die SVB.” They argued it’s “counterintuitively a better time to get more aggressive on runway planning, and that includes debt” for their company, they said.
For those who broke covenants during the bank failure—as in, they withdrew money during the bank run or since deposits opened again on Monday—Mayopoulos reiterated on the Wednesday Zoom call that they‘d “very much like to work with our clients to have those deposits come back to us, and waive any covenant breaches that relate to that.”
One investor, Sheel Mohnot, cofounder and general partner at seed stage VC firm Better Tomorrow Ventures, who was on a Zoom call with Mayopoulos and others on Tuesday, told Fortune that, regarding questions over what happens with the venture debt if the bridge bank gets bought or if assets are sold off, “we don’t know the answer to a lot of this. If it gets acquired, things could change.” Jesse Randall, founder of fintech venture operation Sweater Ventures, who was also on a call with the CEO, told Fortune that from his recollection, Mayopoulos said “current terms on existing loans will be fully honored.”
The reason why the bridge bank is continuing to write new loans appears to be to keep the business going and make the bank and its assets as attractive as possible to potential buyers. Upfront Ventures’ Mark Suster, who was on one of the calls, told Fortune via email that “the venture debt business is a big asset of the bank. It’s a series of cash flows to be expected in the future from the companies that borrowed money…It is the primary thing that a buyer of the bank is buying (alongside banking relationships with tech firms and VCs + PE shops),” he argued.
The new bridge bank has a few options for survival, but The Information reported on Wednesday that the government will likely only sell SVB to another bank.
CEO Mayopoulos said on the call Wednesday that they are still “consummating term sheets. If you were in that process and you want to continue that process, we would love to do that.”
Peter Hébert, cofounder and managing partner at VC firm Lux Capital, told Fortune the firm’s questions for a future SVB owner include: “Does [the] acquirer want to be [a] provider of credit for venture debt? Do they want to [do] asset leasing? Do they want to do capital call lines of credit? Do they want to do partner loan/individual lines of credit? Without knowing who [the] end owner becomes, there is inherent ambiguity.”
As with everything in this debacle, things can seemingly change on a dime.
Jessica Mathews contributed to reporting.