Mortgages, Wine, and Renovations: Silicon Valley Bank’s Deep Tech Ties

When Kleiner Perkins, one of Silicon Valley’s leading venture capital firms, wanted to build a bridge between two of its office buildings around 2005, it decided to take out a loan. It revolved around Silicon Valley Bank, just 13 feet away on Sand Hill Road in the heart of the venture industry in Menlo Park, California.

To make the loan work for Kleiner’s project, which cost more than $500,000, SVB agreed to loan the money at the value of the fees the venture firm would earn from its funds, said four people with knowledge of the situation.

SVB also provided personal banking services to many of Kleiner’s top partners, the people said. That was in addition to the banking services and venture capital that SVB provided to many of Kleiner’s start-ups, as well as mortgages for the founders of those companies. SVB even invested in Kleiner’s funds, two people said.

And when SVB held an annual state of the wine industry event in January, there were speakers from Wine.com, one of the world’s largest online wine retailers and a company in which Kleiner had once invested.

Before SVB failed last week and sparked a global financial panic, it was mostly known as a regional, low-profile bank. But within the tech ecosystem, the bank had molded to the idiosyncrasies and idiosyncrasies of the industry and had become, to an unusual degree, deeply intertwined with the lives and businesses of investors, entrepreneurs and executives.

For 40 years, the institution has kept high-growth, high-risk tech startups and their backers from following normal business practices. These companies prioritize breakneck growth, switch strategies frequently, and celebrate failure as a learning opportunity. They are often worth billions before ever turning a profit, and they can go from foolish idea to behemoth with astonishing speed. Most importantly, they depend on a close-knit network of money, employees, founders, and service providers to function.

That unique and often irrational reality called for a specialized bank.

“There were many ways that Silicon Valley Bank intertwined with the lives of Silicon Valley people that were unique,” ​​said Anat Admati, a professor of finance at Stanford. “The bank had relationships and started relationships with people all over Silicon Valley. It was a meeting point.”

This week, SVB – which was acquired last Friday by the Federal Deposit Insurance Corporation – tried to pick up the pieces of the collapse. On Monday, it called investors to tell them it was open again while looking for a buyer.

Mark Suster, an investor at Upfront Ventures who was on the phone, said he and his company were both clients of the bank. SVB also co-sponsored a conference organized by Mr. Suster recently organized, and in the aftermath of the implosion, Upfront Ventures approved a letterco-signed by a group of companies, which encourages founders to keep or return 50 percent of their total capital with the bank.

“They understand you’re going to have cash in multiple banks, they’d love to be one of them,” Mr. Suster wrote to startup founders on Twitter.

A spokesperson for the FDIC did not respond to a request for comment.

SVB was best known for attracting young, high-risk start-ups that other banks would not bank with. But his tentacles went much further than that.

The bank lent money to many prominent companies, including Andreessen Horowitz. From its own $9.5 billion fund, it invested in startups including OpenDoor, a home buying company, and Chainalysis, a cryptocurrency research startup, as well as venture capital funds including Sequoia Capital’s. It spawned a number of financial technology companies that built tools for early-stage investors. And it schmoozed the tech industry, sponsoring ski trips, conferences, industry newsletters and fancy dinner parties.

It was all part of the virtuous cycle that drives the tech industry, investors and founders said. Whenever a startup wanted a loan, the bank talked to the lenders, said Samir Kaji, who worked at SVB in the 1990s and is now CEO of Allocate, a technology platform for managing risk investments.

“There were constant touchpoints with the investors,” he said. “Everybody knows each other.”

As Silicon Valley’s start-up industry prospered, SVB expanded its services and helped manage the excessive wealth the industry spawned. That included providing lower-interest mortgages to founders to whom other banks would not lend. Many entrepreneurs are worth millions on paper, but have little cash in their bank account.

SVB is also branching out into industries bordering technology, such as the wineries of 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 praised the rescue operation of the SVB received loans from the SVB last week for three of its wineries, according to the bank’s website.

SVB’s dominance was known by Y Combinator, a start-up incubator. Dozens of tech founders who participated in Y Combinator last year were told to open bank accounts with SVB, and were introduced to SVB bankers at Y Combinator events, said three people who participated in Y Combinator’s 2022 class of tech entrepreneurs during the summer.

One described a cocktail hour mixer introducing him to an SVB banker who could provide a loan to his start-up once he graduated from the Y Combinator program. Six months later, when he needed a loan to buy his first house, he approached the SVB. The bank looked at its company’s valuation, based on the money it raised in the first round of financing, and spoke to investors of his company. It issued a loan after two other banks turned it down, he said.

The home loans from the SVB were significantly better than those from traditional banks, according to four people who received them. The loans were $2.5 million to $6 million, with interest rates less than 2.6 percent. Other banks had turned them down or offered more than 3 percent on interest rates, the people said.

Drive Capital, a venture capital firm in Columbus, Ohio, banked with SVB and had lines of credit with the bank that allowed it to transfer money to its start-ups faster than asking its own financiers to send the money for every single deal. SVB also invested in Drive Capital’s first fund and in two of its portfolio companies. Overall, one-third of Drive Capital’s portfolio used SVB’s banking services, including venture capital, a specialized type of credit for venture-backed start-ups.

“If you’re a venture capitalist or startup company, it’s fair to say that SVB has touched every part of your business in one way or another,” said Chris Olsen, an investor with Drive Capital.

Sequoia Capital, a leading company that backed Airbnb, Apple and Zoom, has always recommended startups open an account with SVB, Mike Moritz, a Sequoia partner, writes in a statement. opinion piece from the Financial Times. Stripe, one of the most valuable private tech startups with Sequoia as its largest shareholder, used SVB for a product that allows international startups to form companies in the United States, he noted.

Last week, partners of Andreessen Horowitz sent a letter to its investors to address concerns about SVB’s collapse, according to a copy of the memo reviewed by The New York Times. About half of the company’s start-ups had a banking relationship with the SVB, the memo said. The company also had an outstanding loan of about $16 million from the bank for “tenant improvements” or renovations to the company’s offices.

Marc Andreessen, a founder of Andreessen Horowitz, called hedge funds and some of the world’s largest banks last week to find a buyer for SVB, two people with knowledge of the calls said. Scott Kupor, another Andreessen Horowitz partner, addressed panicked portfolio companies and questions from the firm’s investors.

A spokeswoman for Andreessen Horowitz declined to comment.

Startup founder Matt Mireles met SVB when the bank invited him to the box at the San Francisco Giants stadium in 2010. Ten years later, he struggled to get a mortgage because his start-up, Oasis, an artificial intelligence company that had raised more than $8 million in funding, was unprofitable. He began to think that he could only own a house if he worked for a large technology company.

But the SVB looked at Mr Mireles’ risk finance and list of investors and offered him a reasonable mortgage with a 20 percent down payment.

“That’s one of the nice things about Silicon Valley: the bank and the place,” he said. “These institutions made the entrepreneurial lifestyle — where you might need two or three failures to get to a certain level of success — they made it viable for people.”

Last week, SVB’s greatest strength – its interconnected community of customers – became a double-edged sword. When venture capitalists began to worry about the bank’s financial solvency, it quickly sparked panic in the startup world.

That Thursday, SVB hosted a dinner at the South by Southwest technology festival in Austin, Texas, where grilled salmon and filet mignon were served to a group of investors and start-up founders of Perry’s Steakhouse.

As fears over the bank’s future rippled through group chats, emails and social media, those in attendance began calling the party “the last supper.”

Jake Chapman, an investor at Marque Ventures who attended the dinner, said he took the host aside to ask about the impending meltdown and was turned down. “She just said the balance sheet was strong,” he said.

By the next morning SVB had customers tried to transfer $42 billion in deposits from the bank, prompting the FDIC to shut it down.