#7 - What SVB Closing Tells Us About Funding Models
The End of Free Money ... Maybe
Didn’t think I would have ever included Silicon Valley Bank (SVB) on this list, but it happened. The Federal Insurance Deposit Corporation (FDIC) officially announced on March 10, 203 that SVB is closing to protect the stability of the US Financial system. Now what does this have to do with ClimateTech? SVB in recent years has implied a growing interest in climate tech startups. This will not be a uniquely ClimateTech Startup as SVB provided funding and banking services to a wide range of sectors including technology, life sciences, and venture capital. Today’s newsletter will cover a short background, lessons, and one potential area where ClimateTech founders can turn for upcoming funding.
In case you’re curious, here is a full list of FDIC List of Failed Banks.
History of SVB
Silicon Valley Bank (SVB) is a US-based bank that was founded in 1983 to serve the unique financial needs of technology and innovation-focused companies in the Silicon Valley area. Over the years, SVB has grown into a global financial institution, with a presence in over 30 cities worldwide.
SVB has built a reputation as a leading bank for startups and emerging growth companies. The bank offers a range of financial services tailored to the needs of early-stage and high-growth companies, including venture capital financing, debt financing, cash management, and international banking services.
One of SVB's most significant contributions to the startup ecosystem has been its role in providing financing to early-stage companies. SVB's venture capital arm, SVB Capital, has invested in some of the most successful startups in the world, including Twitter, Uber, and Nest.
Impact on Financial Policies on Startups
The impact of financial policies on startups is significant and must be considered when building a business. Startups prioritizing efficient capital usage, scalable customer acquisition, and validation of their product in the market will be able to get ahead of this policies. While securing funding is important, founders should carefully choose investors and be prepared for due diligence. Financial policies must balance the risks of bankruptcy and systemic risk, while avoiding moral hazard and maintaining regulation to prevent future crises. There is a domino effect whenever something like this happens — next payrolls get frozen and vendors don’t get paid.
By being aware of these considerations and taking a thoughtful approach to building their business and securing funding, startups can position themselves for success. For those of you just now thinking of financial policies that might impact your startup, start here:
Interest Rates: Changes in interest rates can have a significant impact on the availability and cost of credit for startups. When interest rates are low, banks may be more willing to lend money to startups at lower rates, making it easier for them to access capital. Conversely, when interest rates are high, banks may be more reluctant to lend to startups, or may charge higher interest rates to compensate for the increased risk.
Financial Regulations: Regulations such as the Dodd-Frank Act can impact banks' ability to lend money to startups by increasing the regulatory burden on financial institutions. For example, banks may need to hold higher levels of capital as a buffer against potential losses, which can limit the amount of money they have available to lend to startups.
Tax Policies: Tax policies can also impact startups and banks that support them. For example, tax credits and incentives can encourage banks to invest in startups, while changes to tax laws can impact the profitability of banks and their willingness to lend.
Crowdfunding Regulations: The JOBS Act, passed in 2012, made it easier for startups to raise capital through crowdfunding. However, there are still regulations in place that limit the amount of money that can be raised through crowdfunding, and require certain disclosures to be made to investors.
Government Grants: Government grants can be a source of funding for startups, but they may also come with restrictions and regulations that can impact a startup's ability to operate. For example, a government grant may require a startup to use the funds for a specific purpose or may require them to meet certain milestones in order to continue receiving funding.
IPO Regulations: Regulations around initial public offerings (IPOs) can impact startups that are looking to go public. For example, the Securities and Exchange Commission (SEC) requires companies to meet certain financial reporting requirements before they can go public, which can be a challenge for startups that may not have a long financial history.
Capital Reserve Requirements: Banks are required to hold a certain amount of capital in reserve to ensure that they have enough money to cover potential losses. These reserve requirements can impact a bank's ability to lend to startups, as they limit the amount of money that the bank has available to lend.
Lessons
As someone with no skin in the game, I’m taking this as a learning opportunity. I’m simply fascinated with financial regulations at macro level and believe that short-sighted cash seeking is a loosing strategy for any startup. The closure of SVB highlights the importance of building a sustainable business model with healthy cash flows. A strategy for any entrepreneur - prioritize efficient capital burn, scalable cost of customer acquisition, talent acquisition, demonstration of a scalable business model, and in-market validation of the product, and be careful in choosing investors.
Parting Thoughts
Diversify, don’t panic. I am a bit of a policy and regulatory bookworm. Here is two databases tracking legislative bills offering an overview of state level market opportunities that need to be chased starting on Monday.
If you’re building or know someone within the ClimateTech or affected by the SVB closure transition, let me know. I would love to chat, read your comments here, or exchange ideas on LinkedIn or Twitter. Healthy debate is always welcomed to ensure that we are on the right track.