Boston-area tech companies need alternatives to lodge their cash reserves, and are keeping their eyes out for new sources of bank debt. iStock image.
Silicon Valley Bank’s March collapse may have vanished from the headlines, but the resulting dust is far from settled as its successor and a prominent local bank jockey for the opportunity to serve Massachusetts’ tech and biotech startups.
Even after SVB was absorbed by Raleigh, North Carolina-based First Citizens Bank, it lost another $7 billion in deposits on top of the two-day, $43.8 billion bank run that collapsed it before outflows stabilized. Among those dollars: deposits owned by local startups whose boards demanded they diversify where they kept their cash in order to prevent any one bank failure from taking out their savings.
Megabanks were the biggest beneficiaries of this deposit reshuffling, according to quarterly earnings calls, but local startup leaders say those dollars and banking relationships could stay in flux for the time being. And community banks’ ability to offer a personalized touch might just be a major difference-maker if they try to go after not just this unique class of business deposits, but also try to build lending relationships with early-stage companies.
“The landscape is far from settled. The equilibrium has not yet been found between diversification of holdings, style of accounts, debt and the terms that are associated with that,” said Ari Glantz executive director of the New England Venture Capital Association.
Cambridge Trust Plans Growth
At least one local bank, the $5.5 billion-asset Cambridge Trust, is bullish on its ability to drive growth in this new environment.
The bank’s “innovation banking” unit has been burrowing into the local startup scene since 2016.
“Really, it started because Cambridge Trust is in Harvard Square and Kendall Square, and for years it had tech companies coming in and opening accounts because they were the local option when [tech companies] got seed funding,” said unit director Chris Roy.
After what Roy describes as a “very conservative” start lending only on the basis of a startup’s cashflow, the bank now offers a suite of debt products to startups, from typical business products like recurring lines of credit to more bespoke options like several lending products tailored to insurtech firms’ unique needs and debt facilities that help startups of many stripes extend their runway until the next round of venture investment, Roy said.
“We’ve had a lot of success as a smaller local player. We’ve had the bandwidth and interest in growing companies in our local market,” said Roy, an SVB and PNC Bank veteran who joined Cambridge Trust in 2021. “They get personal touch and service…that a pre-IPO company might get at a larger bank.”
Roy said his team is also “very focused” on cross-selling other Cambridge Trust capabilities to its customers, like treasury products or the services from the bank’s $4.4 billion wealth management arm.
Having already built out capabilities geared toward companies between their first and fourth rounds of venture financing and invested significantly in relationships with entrepreneurs across the local startup scenes, Roy said he believes “there’s still a lot of greenfield opportunity to grow this group” thanks to the current dislocation in the lending market.
Future of Debt Relationships Uncertain
But Cambridge Trust is going to face competition, not just from Silicon Valley Bank – which is retaining its unique brand identity despite now being a unit of First Citizens Bank – but also from megabanks that first drew startups’ deposits as “too big to fail” safe havens.
“There is no more banking with one brand anymore; it’s banking with two or three or four,” Kelly Fryer, executive director at Boston’s Fintech Sandbox, said in a statement. “Several of these [brand-name] banks are now quickly standing up new startup banking practices – or expediting operations on practices already in progress – to meet the influx of startups’ unique needs.”
To win over startups as long-term clients, Fryer said, a bank can’t apply a one-size-fits-all financial relationship and will have to invest in other ways to add value to the relationship in areas like payroll management, early customer onboarding and hiring. But the payoff potential is there.
“After the SVB bank run, everyone is rethinking their business wallet and risk exposure. It has made all parties – across founders, enterprises, suppliers, customers, and more – much more open to alternatives and changing their strategy,” Fryer said.
It’s not like startups hold all the cards in these relationships, though, the New England Venture Capital Association’s Glantz said. Before its collapse, SVB had won legions of startup clients by offering significant amounts of debt backed not primarily by a company’s own assets or cashflow, but by the cash and other assets of the venture capitalists who backed it – provided the startup and the financiers all banked at SVB.
With that model’s future now up in the air as startups try to spread their cash around to reduce exposure to trouble at any one bank, Glantz said, banks might have a few levers to pull, too.
“The interesting question is when companies are going after debt, what do those asset allocation relationships start to look like? What covenants, what minimums are the banking debt providers going to require? And what are the compromises on terms that companies are going to have to accept to continue spreading their cash around?” he said.
SVB Not Going Quietly
For its part, Silicon Valley Bank isn’t planning on going anywhere, newly appointed SVB Commercial President Marc Cadieux said.
“If you’re a client in the United States, all the same products and services are still here,” he said, including its signature venture debt capability.
In an interview with Banker & Tradesman, Cadieux described how, since being acquired by First Citizens this spring, SVB bankers have been working the phones to connect with clients and answer their questions, holding client webinars and attending industry events, on top of refreshing the bank’s marketing and messaging – “anything and everything to get the word out,” he said.
One advantage, he said, has been First Citizens’ decision not to impose its own branding on its new acquisitions.
“It’s clear the brand still resonates with clients in the innovation economy,” said Cadieux, who was SVB’s chief credit officer before the bank’s March 10 collapse.
Given the pinch many startups are feeling as valuations shrink and venture capitalists get much more conservative with their money in the face of Federal Reserve interest rate increases and economic uncertainty, SBV plans to focus on taking care of current clients and “prosecuting the business people want to do with us,” Cadieux said, noting that “nothing is going to work better than being the SVB people remember.”
And despite the deposit and talent attrition it’s endured, he said the bank expects to retain or draw back many of its pre-collapse startup clients based on what many have told Cadieux and his bankers after sampling other lenders’ offerings this spring.
“It may be familiarity [with SVB] but I think it has more to do with how devilishly difficult it is to generate that same service level,” he said, calling it “heartening.”
First Citizens plans to respect that expertise, Cadieux said.
“What we’ve heard from First Citizens from Day One is that, ‘We acquired you because you do so many different things from what we do,’” he said.
Other Banks Face Challenges
Indeed, other community banks looking to take a piece of the startup pie may find themselves challenged. Banks that understand a startup’s unique needs are thin enough on the ground that “if you build it, they will come,” Glantz said. But it’s also clear that bankers who are used to traditional commercial and industrial lending will face a steep learning curve.
James Sanna
First, without profits or a lot of physical assets to secure a loan with, many startups don’t have what’s typically needed for a traditional underwriting process.
Software companies with long-term contracts represent an additional challenge, Cambridge Trust’s Roy said. A banker will have to figure out how mission-critical a company’s software is to its clients in order to be able to understand how much of a credit risk that firm is. And biotechs, many of whom spend years researching and testing drugs before these cures show up in hospitals and on pharmacy shelves, are “a different animal,” he said.
But startups also move significantly faster than traditional C&I customers, Glantz said, and have grown accustomed to fairly personalized service and cooperation with their bankers – an area where bigger banks’ efforts to grow a portfolio of startup clients may run into limitations.
“They just have a lot more clients and a lot more assets under management, and there’s only so much attention to go around – especially when the return on that bandwidth investment on a smaller, earlier-stage client might not be the same as a later-stage client,” he said.
