Was The Silicon Valley Bank Collapse 'Just A Tough Weekend' For Proptech Or A Warning Sign?
The stunning collapses of Silicon Valley Bank and Signature Bank sent the entire startup and venture capital ecosystem in the U.S. into chaos, and proptech was no exception.
If the weekend sent one message, it was this: Time to grow up.
When the Federal Reserve stepped in to guarantee depositors’ funds on Sunday night, it allowed companies to take a cautious deep breath and turn their attention to making themselves less vulnerable to the next banking crisis, if and when it happens.
“I would imagine several bottles of wine around the world were uncorked late on Sunday night,” Aaron Block, MetaProp co-founder and managing partner, told Bisnow Tuesday. “I think there was a lot of worry, of course, about making payroll and being able to access cash. The second-biggest concern everyone had was contagion and what that would do in the short and medium term, and I think that’s still an unresolved question, though people are starting to feel better today.
"It’s still day-by-day, hour-by-hour with everyone checking the news and group chats obsessively.”
As a result of being less clustered in Silicon Valley itself, proptech companies were less likely to be squarely in harm’s way over the weekend. But even companies without any attachment to SVB or Signature are making changes, sources told Bisnow.
Many early stage and smaller companies had financial situations akin to a person in their late 20s relying on the same bank account their parents helped them set up when they went to college.
“It’s about sophistication,” Shadow Ventures founder KP Reddy said. “If you’re a startup with $1.5M, you’re doing your own books. You may have a bookkeeper, but you can’t afford a CFO. You don’t worry about a bank going under; you see the FDIC plaque in a bank and you don’t worry.”
Proptech-oriented venture capitalists Block, Reddy, Camber Creek Managing Partner Jake Fingert and Alpaca VC General Partner Ryan Freedman are in many of the same group chats that precipitated the run on SVB last week, though their portfolios had varying levels of exposure, they told Bisnow. In Alpaca’s portfolio, 16 companies banked with SVB.
“Only rarely was it all of their capital, but it did happen a few times,” Freedman said. “So everyone is in the process of setting up new procedures and protocols. For our companies, that would be [opening] multiple accounts with sub-$250K [balances].”
Block, Reddy, Fingert and Freedman were able to work with most of their affected portfolio companies to withdraw money from SVB and Signature before the Fed and the Treasury Department put them under receivership with the Federal Deposit Insurance Corp. If their constantly buzzing phones hadn’t hammered home how widespread the issue was, the hours-long processing delays they experienced for wire transfers did the job.
“Typically, we send out wires and within 5 minutes, it shows up in the next account,” Reddy said Monday. “This morning, it’s been 3 or 4 hours, so clearly, we’re not the only ones wiring money around, if the system is that backed up.”
Amid the flurry of new deposits, a clear theme has emerged: Startups want to bank with institutions even larger than SVB and Signature. Giants like JPMorgan Chase and Bank of America are seen as better insulated against a confidence crisis in one part of the economy due to their diversification almost as much as their size.
But one of the reasons SVB snapped up so much business was the way it catered to startups in terms of both product offerings and relationship-building, Block said. With big banks dealing with an influx of specialized clients, it would come as no surprise if the startup ecosystem saw an opportunity to fill a niche with a new product.
“There’s a longer-term issue everyone is grappling with around risk management, around how you handle cash, banking relationships and debt, and what the new protocols and best practices are,” Block said. “I think that’s an exciting outcome of this, in that there could be one or several new ways for companies, particularly early stage and fast-growing companies, to participate in the banking sector as clients.”
The mere fact that startups and investors have started looking ahead again underscores how federal intervention reduced the situation’s urgency. But the basic mechanics of financial restructuring shouldn’t take long for most companies to resolve — perhaps as little as a week or two.
“I think it was just an extra cycle of work,” Reddy said. “Just a tough weekend and a tough week of getting your ducks in a row and doing a bunch of paperwork.”
While the existential danger seems to have passed for now, lenders and borrowers alike in proptech are likely to be even more cautious with debt in the short to medium term, though rising interest rates had already suppressed activity in that area, Fingert and Block said.
“If you think through the second- and third-order implications, one will be that for equity investors, you should have some more attractive pricing going forward,” Fingert said. “So if these companies don’t have the same financing options that they had even a month ago, they’ll be more reliant on equity investment.”
Since the economy started to come down from its 2021 high, the startup ecosystem has had to focus more on profitability than the growth-at-all-costs model SoftBank Group and its Vision Fund became known for.
Yet the vanishing of cheap debt and the more conservative posture taken by the VC sector has been a reality for months, leaving little room for things to get worse in that area, Block said. The founders of pre-revenue companies have less leverage in negotiations with investors than they have had in years.
“If anything, we’re on our toes looking for distressed startups that didn’t have the right teams,” Block said. “Now, we can go in, buy inexpensively, make some changes and add sophistication. I think this is a real opportunity for the most sophisticated venture investors to take advantage of distress.”
Of course, in order for SVB’s collapse to actually have an impact on how startups and proptech do business, the Fed, Treasury and FDIC will need to back up their assistance with a sense of consequences, Fingert said, echoing comments made by President Joe Biden in the wake of Sunday’s rescue. Otherwise, it will only make the concept of risk more abstract after a weekend when the downside felt more real and urgent than it had in years.
“I think it’s right to have concerns that if people think they can bank without risk and the federal government will always step in, it creates a moral hazard problem in the medium term,” Fingert said.
Though regional bank stocks — which have become a crucial source of CRE debt in the current environment — recovered somewhat on Tuesday after seeing steep drops in share value on Friday and Monday, the risk of contagion has not vanished entirely, Fingert said.
Another potential issue that still looms is the endgame for Signature Bank’s real estate lending practice, which was much larger than SVB’s, Block said. But if all this past weekend did was teach a class of naive entrepreneurs a lesson, more work may be needed to make that lesson stick.
“You have an entire generation that thinks things only move up and to the right; it’s been a 10-year run,” Reddy said. “If you’re 32 years old, this is all you know.”