When Kleiner Perkins, one of Silicon Valley’s top venture capital firms, wanted to build a bridge between two of its office buildings in 2005, it decided to borrow. It’s back to Silicon Valley Bank, 43 feet away on Sand Hill Road in the heart of the venture industry in Menlo Park, California.
SVB has agreed to loan money against the value of the fee the venture firm is set to earn from its funds, four people familiar with the situation said, to finance the loan for Kleiner’s project, which will cost more than $500,000.
SVB also provided personal banking services to several of Kleiner’s key shareholders, the people said. In addition to banking services and venture loans provided by SVB to many of Kleiner’s start-ups and mortgage loans to the founders of those companies. SVB even invested in Kleiner’s funds, two of the people said.
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 Wine.com, a company Kleiner once invested in.
Before SVB’s failure last week sparked global financial panic, it was largely known as a regional, low-profile bank. But within the ecosystem of technology, banking has molded itself to the idiosyncrasies and idiosyncrasies of the industry, becoming extraordinarily deeply intertwined in the lives and businesses of investors, entrepreneurs and executives.
For 40 years, the company has observed the fact that high-growth, high-risk technology start-ups and their backers don’t follow normal business practices. These companies prioritize disruptive growth, change strategies frequently, and celebrate failure. They’re worth billions before they ever turn a profit, and they can go from silly idea to behemoth with astonishing speed. More importantly, they rely on a tight network of money, workers, founders and service providers to function.
That unique and often irrational reality required a special bank.
“Silicon Valley Bank is intertwined in many ways in the lives of people in Silicon Valley,” said Anat Admati, a finance professor at Stanford. “The bank has built relationships and relationships with people across Silicon Valley. It was a rallying point.
This week, SVB — which was taken over by the Federal Deposit Insurance Corp. last Friday — tried to pick up the pieces from its collapse. On Monday, it called investors that it was reopening for business, although it was looking for a buyer.
Mark Suster, an investor at Upfront Ventures who was on the call, said he and his company are clients of the bank. Recently Mr. SVB co-sponsored a conference hosted by Sisters, and after the explosion, Upfront Ventures endorsed it. LetterCo-signed with a group of companies, it encourages founders to keep or return 50 percent of their total capital in the bank.
“They understand you have money in multiple banks and want to be one of them,” Mr. Shuster wrote to startup founders on Twitter.
A spokeswoman for the FDIC did not respond to a request for comment.
SVB is best known for helping young, risky start-ups out of contact with other banks. But its tentacles went beyond that.
The bank lent money to several top venture firms, including Andreessen Horowitz. From its own $9.5 billion fund, OpenDoor has invested in start-ups including home-buying firm Chainalysis, a cryptocurrency investigation start-up, and venture capital funds including Sequoia Capital. It has also incubated some financial technology companies that develop tools for startup investors. It disrupted the tech industry, sponsoring ski trips, conferences, industry newsletters and fancy dinners.
That’s part of the virtuous cycle that makes the tech industry tick, investors and founders said. Any time a start-up wants to get a loan, the bank has talked to its backers, Samir Ghazi, who worked at SVB in the 1990s and is now chief executive of Allocate, a technology platform for managing venture investments.
“There were constant points of contact with investors,” he said. “Everybody knows each other.”
As Silicon Valley’s start-up industry has grown, SVB has expanded its services to help manage more of the wealth the industry is generating. This includes offering low-interest-rate mortgages to founders that other banks won’t lend to. Many entrepreneurs have millions on paper, but little money in their bank accounts.
SVB also branched out into industries close to technology, such as the wineries of the Napa and Sonoma valleys, where many tech founders and executives spend their weekends. Last year, the bank lent $1.2 billion to wine producers.
Gavin Newsom, Governor of California, who Appreciated SVP’s bailout According to the bank’s website, last week, it received loans from SVB for three wineries.
SVP’s dominance at start-up incubator Y Combinator is well known. Dozens of tech founders who participated in Y Combinator last year were asked to open bank accounts at SVB, and they were introduced to SVB bankers at Y Combinator events, said three people who participated in Y Combinator’s 2022 class of tech entrepreneurs over the summer.
He described a cocktail hour mixer where he was introduced to an SVB banker who could lend to his start-up once he graduated from the Y Combinator program. Six months later, when he needed a loan to buy his first home, he called SVP. The bank looked at his company’s valuation based on the money it raised in its first round of funding and spoke to his company’s investors. It gave him the loan after two other banks turned him down, he said.
SVB’s home loans were better than loans from traditional banks, said four people who received them. Loans ranged from $2.5 million to $6 million, with interest rates as low as 2.6 percent. Other banks either turned them down or quoted interest rates higher than 3 percent, the people said.
Drive Capital, a venture capital firm based in Columbus, Ohio, banks with SVB and has secured lines of credit from the bank that have allowed it to provide money to its startups faster than asking its own backers to send money for each individual deal. SVP invested in Drive Capital’s first fund and two of its portfolio companies. In total, one-third of Drive Capital’s portfolio used SVB’s banking services, including Venture Loan, a specialized loan for venture-backed start-ups.
“If you’re a venture capitalist or a start-up company, SVB touches every part of your business,” said Chris Olson, an investor at Drive Capital.
Sequoia Capital, a top venture firm that backs Airbnb, Apple and Zoom, always recommends its start-ups open an account with SVB, Mike Moritz, a Sequoia partner, wrote in an article. Comment by Financial Times. Stripe, which is one of the most valuable private tech startups and counts Sequoia as its largest shareholder, used SVB for a product that allows international start-ups to establish companies in the United States, he noted.
Last week, shareholders at Andreessen Horowitz sent a letter to its investors to assuage concerns about SVB’s collapse, according to a copy of the memo reviewed by The New York Times. Half of the company’s start-ups had banking ties with SVB, the note said. The company secured a loan of about $16 million from the bank for “tenant development,” or renovation of the company’s offices.
Andreessen Horowitz founder Marc Andreessen called on hedge funds and some of the world’s biggest banks to find a buyer for SVB last week, two people familiar with the calls said. Scott Kupor, another Andreessen Horowitz partner, fielded questions from panicked portfolio companies and the company’s investors.
An Andreessen Horowitz spokeswoman declined to comment.
Start-up founder Matt Mireles encountered SVB in 2010 when the bank invited him to his box at the San Francisco Giants stadium. Ten years later, he was having trouble getting a mortgage because his start-up, Oasis, an artificial intelligence company that had raised more than $8 million, wasn’t turning a profit. He began to think that he could only build his own house if he worked for a large tech company.
But SVB, Mr. Mireles’ list of venture funds and investors offered him a reasonable mortgage with a 20 percent down payment.
“It’s one of the best things about Silicon Valley — banking and location,” he said. “These companies created the entrepreneurial lifestyle — where you can take two or three failures to achieve some success — and they made it possible for people.”
Last week, SVB’s biggest strength — its interconnected community of customers — turned into a double-edged sword. When venture capitalists began to worry about the bank’s financial solvency, it soon caused panic throughout the start-up world.
That Thursday, SVB served chargrilled salmon and filet mignon to investors and start-up founders at Ferris Steakhouse at the South by Southwest tech festival in Austin, Texas.
As concern about the bank’s future rippled through group chats, emails and social media, attendees began referring to the banquet as the “Last Supper.”
Jake Chapman, an investor at Mark Ventures who attended the dinner, said he pulled the host aside to ask about the fever and was rebuffed. “She said the balance sheet is strong,” he said.
The next morning, SVB had customers Tried to change $42 billion in deposits from the bank, leading the FDIC to shut it down.