When Kleiner Perkins, one of Silicon Valley’s most prominent venture capital firms, wanted to build a bridge between two of its office buildings around 2005, it decided to take out a loan. It turned to Silicon Valley Bankjust 43 feet from here 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 money for the value of the fees the venture capital firm was expected to earn from its funds, four people with knowledge of the situation said.
SVB also provided personal banking services to many of Kleiner’s top partners, the people said. This was in addition to the banking services and venture debt that SVB provided to many of Kleiner’s start-up businesses, as well as mortgages for the founders of these companies. SVB even invested in Kleiner’s funds, two of the people said.
And when SVB held its annual State of the Wine Industry event in January, it featured speakers from Wine.com, one of the world’s largest online wine retailers and a company in which Kleiner once invested.
Before SVB failed last week and sparked a global financial panic, it was primarily known as a low-profile regional bank. But within the technology ecosystem, the bank has adapted to the industry’s quirks and idiosyncrasies, becoming unusually deeply intertwined in the lives and businesses of investors, entrepreneurs and executives.
For 40 years, the institution has ensured that high-growth, high-risk technology start-ups and their backers do not follow normal business practices. These companies prioritize breakneck growth, change strategies frequently, and celebrate failure. Often worth billions before they ever turn a profit, they can go from dumb idea to behemoth with amazing speed. Most importantly, they rely on a tight network of money, workers, founders and service providers to function.
This unique and often irrational reality required a specialized bank.
“There have been many unique ways that Silicon Valley Bank has woven itself into the lives of people in Silicon Valley,” said Anat Admati, a professor of finance at Stanford. “The bank had relationships and established relationships with people in Silicon Valley. It was a gathering place.”
This week, SVB — which was taken over by the Federal Deposit Insurance Corporation last Friday — tried to pick up the pieces from its collapse. She held a call with investors on Monday to tell them she had reopened her business, although it was looking for a buyer.
Mark Suster, an investor with Upfront Ventures who was on the call, said he and his firm are both customers of the bank. SVB also co-sponsored a conference recently hosted by Mr. Suster’s firm, and after the implosion, Upfront Ventures backed letterco-signed by a group of firms, encouraging founders to retain or return 50 percent of their total capital to the bank.
“They understand you’re going to have cash in multiple banks, they’d like to be one of them,” Mr. Suster he wrote to the start-up founders on Twitter.
An FDIC spokesman did not respond to a request for comment.
SVB was best known for courting young, risky start-ups that other banks wouldn’t bank with. But his tentacles went far beyond that.
The bank lent cash to many leading venture firms, including Andreessen Horowitz. With its own $9.5 billion fund, it has invested in startups including OpenDoor, a home-buying company, and Chainalysis, a cryptocurrency investigative startup, as well as venture capital funds, including Sequoia Capital’s. He incubated some financial technology companies that created tools for early stage investors. And he wowed the tech industry, sponsoring ski trips, conferences, industry newsletters and fancy dinners.
It was all part of the virtuous cycle that compels the tech industry, investors and founders said. Whenever a start-up wanted a loan, the bank would talk to its backers, said Samir Kaji, who worked at SVB in the 1990s and is now CEO of Allocate, a technology platform for risk investment management.
“There were constant points of contact with investors,” he said. “Everyone knows each other.”
As Silicon Valley’s startup industry flourished, SVB expanded its services and helped manage the vast wealth the industry was producing. This included providing lower-interest mortgages to founders that other banks wouldn’t lend to. Many entrepreneurs are worth millions in paper, but have little cash in their bank accounts.
SVB has also expanded into tech-adjacent industries such as the wineries of Napa and Sonoma Valleys, where many founders and executives spend their weekends. Last year, the bank lent 1.2 billion dollars to wine producers.
Gavin Newsom, Governor of California, who praised the rescue of SVB last week he received loans from SVB for three of his wineries, according to the bank’s website.
SVB’s dominance was well known Y combinator, a startup incubator. Dozens of tech founders who participated in Y Combinator last year were told to open bank accounts with SVB, and SVB bankers were introduced at Y Combinator events, said three people who attended Y Combinator’s 2022 tech entrepreneur class in the summer.
One described a cocktail hour mixer in which he was introduced to an SVB banker who could provide a loan to his startup once it completed the Y Combinator program. Six months later, when he needed a loan to buy his first home, he went to SVB. The bank looked at the valuation of his company based on the money it raised in the first round of funding and talked to his company’s investors. It provided the loan after two other banks turned it down, he said.
Housing loans from SVB were significantly better than from traditional banks, said four people who received them. Loans ranged from $2.5 million to $6 million with interest rates below 2.6 percent. Other banks turned them down or, when given interest rates, offered over 3 percent, the people said.
Drive Capital, a venture firm in Columbus, Ohio, banked with SVB and had lines of credit with the bank that allowed it to transfer money to its startups faster than asking its own backers to send money for each individual transaction. SVB also invested in Drive Capital’s first fund and in two of its portfolio companies. In total, a third of Drive Capital’s portfolio used SVB’s banking services, which included venture debt, a specialized type of loan for start-ups backed by venture capital.
“If you’re a venture capitalist or a startup, it’s fair to say that in some way, shape, or form, SVB has touched every part of your business,” said Chris Olsen, investor at Drive Capital.
Sequoia Capital, the top venture firm that has backed Airbnb, Apple and Zoom, has always recommended its startups open an account with SVB, wrote Mike Moritz, a partner at Sequoia. Financial Times Opinion. Stripwhich is one of the most valuable private technology startups and counts Sequoia as its largest shareholder, used SVB for a product that allows international startups to establish companies in the United States, he noted.
Last week, Andreessen Horowitz partners sent a letter to their investors to ease concerns about SVB’s collapse, according to a copy of the memo reviewed by The New York Times. About half of the start-up companies had banking relationships with SVB, the report states. The firm also had an outstanding bank loan of about $16 million for “tenant improvements,” or renovations to the firm’s offices.
Marc Andreessen, the founder of Andreessen Horowitz, called hedge funds and some of the world’s biggest banks last week to help find a buyer for SVB, two people with knowledge of the calls said. Scott Kupor, another partner at Andreessen Horowitz, dealt with panicked portfolio companies and questions from the firm’s investors.
A spokeswoman for Andreessen Horowitz declined to comment.
Matt Mireles, the startup’s founder, came across SVB when the bank invited him to its box at the San Francisco Giants stadium in 2010. A decade later, he was having trouble getting a mortgage because his start-up, Oasis, an artificial intelligence company that had raised more than $8 million in funding, was losing money. He began to think that the only way he could own a home was to work for a large technology company.
But SVB looked at Mr. Mireles’ risk financing and investor list and offered him a reasonable mortgage with a 20 percent down payment.
“That’s one of the things that’s great about Silicon Valley — the bank and the place,” he said. “These institutions have made the entrepreneurial lifestyle — where it only takes two or three failures to reach a certain level of success — viable for people.”
Last week, SVB’s greatest strength – its connected community of customers – became a double-edged sword. When venture capitalists began to worry about the bank’s financial solvency, which quickly led to panic across the startup world.
That Thursday, SVB hosted a dinner at the South by Southwest tech festival in Austin, Texas, serving grilled salmon and filet mignon to a group of investors and startup founders at Perry’s Steakhouse.
As concerns about the bank’s future reverberated in group chats, emails and social media, attendees began referring to the party as “the last supper.”
Jake Chapman, an investor at Marque Ventures who attended the dinner, said he pulled the host aside to ask about the brewery’s collapse and was rebuffed. “She just said the balance sheet is strong,” he said.
By the next morning, customers had SVB tried to transfer $42 billion in deposits from the bank, prompting the FDIC to close it.
