Like a lot of startup founders, Liz Giorgi watched the collapse of Silicon Valley Bank on that ill-fated Friday in March with just one question in mind: How am I going to make payroll on Monday?
Her company, a virtual photo shoot platform called Soona, had raised $35 million in 2021, the majority of which was tied up at SVB. Giorgi had scrambled to get board approval to move the money elsewhere, but once the feds took over, it was too late. She spent the weekend frantically pursuing other options, but found only dead ends: Other banks, afraid for their own futures, weren’t going to give her a line of credit quickly. She could liquidate her own personal assets, but it would take too long.
Giorgi had just resorted to asking her board to wire her money by noon on Monday to cover payroll for her 135-person staff when the Biden administration announced that all of SVB’s customers would be made whole.
The immediate crisis was averted. But as Giorgi and others have since learned, the legacy of SVB’s collapse continues to hover over tech startups that were already being squeezed by an uncertain economy and general skittishness among investors, forcing leaders like Giorgi to grapple with new questions about how to secure their companies’ financial future.
“As a startup, the last thing you’re thinking about is how can I strategically move my money around in such a way that I am constantly under the FDIC limits,” Giorgi says. “As of this week, we’re still making some final decisions about what we’re going to do.”
Last year was already a gloomy one for the tech sector, marked by dwindling venture investments and mass layoffs at some of the industry’s most powerful companies. But the first quarter of 2023 isn’t looking much brighter: According to a new report by the National Venture Capital Association and PitchBook, released last week, venture investment across all stages continued to decline during the first three months of the year. With the IPO market more or less frozen, investors aren’t getting their money back, leading to declines in both the number and value of late-stage deals.
Not all of this is attributable to SVB’s collapse, of course. Inflation, rising interest rates, and global instability have all contributed to the crunch. But SVB’s undoing has had a particularly pointed impact on investors’ psyches, which is likely to have lasting ripple effects on startups seeking capital, says Kyle Stanford, a senior analyst at PitchBook and an author on the report.
“It definitely didn’t hurt them, but it did scare them,” Stanford says of venture capital firms. Now, as those firms try to raise money from limited partners, they may face new questions about financial risk management that they didn’t get before. “They’re going to be much more diligent next time,” Stanford says.
Some startups were fortunate enough to raise funds before the collapse of SVB, but for Tracy Warren, CEO of Astarte Medical, which makes decision support software for hospitals, this shift has meant completely rethinking the company’s finances for the next 12 to 18 months.
Astarte had previously raised $12 million in two rounds, one in 2019 and the other in the cushy days of 2021 when funding, particularly for digital health companies, was plentiful. Warren had hoped to raise another $8 million this year, but even before the SVB implosion, she was sensing resistance among investors.
“The digital health bubble had sort of burst,” Warren says, but after SVB’s collapse, “it just meant everything got worse.”
In response to this, Warren says her eight-person company has had to totally reconsider its budget, scaling back on non-essential travel, postponing certain new hires, and asking senior managers to defer a portion of their compensation. She’s also tapped her existing network of investors to provide some near-term funding in the form of a convertible note.
As a former VC herself, Warren understands that any period of uncertainty is going to lead to more scrutiny and longer wait times for deals. But she also believes that investors’ current hesitancy has more to do with the mental and emotional toll of SVB’s collapse than any substantive hit they’ve taken. “I get a little frustrated as a CEO,” she says. “It’s like, now that you’ve all been made whole, and it’s back to business, why are things still taking long? Why are people not deploying capital?”
Of course, venture funds have faced stressors beyond SVB alone. The last year has seen a dramatic drop in both the number and value of exits, leading to a liquidity crunch among both venture capital funds and their investors. “SVB was obviously just another pressure,” says Stanford.
Alessandro Chesser also had big plans to raise funds this year for his company, Dynasty, which runs an online platform for creating a living trust. That money would have gone toward a marketing budget and hiring business development talent to help with customer acquisition, which Chesser calls the “traditional venture capital model.” But it’s become clear to Chesser, who is himself a former SVB employee, that the market is so sour, even if he could find investors willing to make a deal, it might not be a deal worth taking. “Could we go out and meet 100 or 200 investors and raise capital? Yeah, we can definitely do that,” he says. “But the terms are going to be terrible for our company.”
Now, Chesser plans on bootstrapping the company for the foreseeable future, which means setting lower revenue targets and keeping costs at a minimum. “We’ve changed our thoughts on how to build this company,” he says. “We’re starting with profits, looking for the leanest, lightest ways to distribute this product.”
If the market is challenging for companies that already have revenue and customers, it’s been brutal for seed-stage startups. According to PitchBook, in the first quarter of the year, angel and seed rounds accounted for just 34 percent of all deals, which is the smallest that figure has been in a decade. For Zach Holman, cofounder of WorkOn, an online marketplace for athletes looking to improve their skills, that has made this year “probably the worst time ever to be raising.”
He’s been thinking a lot lately about how to reposition the company to better align what seems to be capturing investors’ attention recently. “Obviously, we sprinkle some AI in there,” he says, noting that generative AI could assist in video analysis on the platform. “Investors love that stuff.” But ultimately, Holman’s also wondering if it’s smarter to forgo outside investment for the time being. “If we can just build this on our own, we don’t have to deal with the dilution,” he says.
Even for founders like Giorgi who weren’t actively fundraising when SVB fell apart, the collapse has still continued to be an impediment. Shopping for a new bank, for one, has been surprisingly difficult. As a graduate of the TechStars accelerator, it had almost been a given that she and everyone else in the program would bank with SVB. “SVB was sort of the default option,” she says.
SVB had developed a culture that catered to the unique ways startups operate. As a software company, for instance, Soona doesn’t have a lot of collateral to offer banks to help them manage risk before extending a line of credit. SVB pioneered the venture debt model and made it possible for even lean startups to use debt to grow their businesses anyway. Giorgi says other banks haven’t caught up.
“To them, that’s not really worth the risk,” she says, noting that some banks have tried to offset that risk with “outlandish” interest rates. Others have proposed payment schedules that don’t align with the reality of running a fast-growing startup, she says. “You don’t want a line of credit that you have to pay back every single month,” Giorgi, who also had debt financing from SVB, says. “You’re intentionally using debt as a path to grow.”
Stanford predicts this may change in the aftermath of SVB’s collapse, as new entrants enter the market. “Venture debt, we believe, is going to stay pretty strong,” he says. “But that’s always going to be for companies that have a long cash runway, and it’s going to be for companies that are generating really strong revenues.”
All of this has slowed down business as usual for companies that are used to banking with a partner who understood the quirks of tech startups. But that may not be such a bad thing, given the lessons learned from SVB, says Stanford. “Keeping all the money in a single bank was not the safest move, and now investors and founders are getting much more diligent in where they’re going to store their cash and how they’re going to use that to operate,” he says. “It’s the shock to the system that the market needed.”
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