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Sorry for a dumb question: Apparently lots of VCs and startups use SVB as their bank. Could someone explain why would startups not choose relatively safer big

by db1234 4y ago

Sorry for a dumb question: Apparently lots of VCs and startups use SVB as their bank. Could someone explain why would startups not choose relatively safer big banks like BoA or Chase? What are the advantages of using SVB as the primary financial institution?

frankchn 4y ago
Venture-backed startups are weird in terms of cashflow compared to traditional businesses. They appear out of thin air with no history and millions of dollars. They then constantly burn money in the tens to hundreds of thousands of dollars a month until they disappear or get injected with millions more dollars. Often, traditional banks don't know how to deal with these entities and it sets off tons of alarms in their fraud and risk management departments. SVB and related departments know the business and financial models of startups a lot better and are more willing to help.
- deleted 4y ago
  [deleted]
- twelve40 4y ago
  i really wonder if that was a problem. My last startup banked with Wells Fargo for a while all the way from pre-seed to A, and it seemed to be fine. Anyway, my number 1 ask from any bank is not to fail, before anything else, and that didn't really work out great here. If SVB was a top-5 bank it probably would have been bailed out by the govt. Not great, but probably safer for the customers.
- bloodyplonker22 4y ago
  This makes complete sense, however, why would big banks not want to compete against SVB by establishing a smaller division that handles startups? Obviously, the market is small compared to their usual markets, but there is still a lot of good money to be made.
  - frankchn 4y ago
    If the deposits are going on the parent bank's balance sheet, it would be subject to the same controls.
  - icelancer 4y ago
    Bank of America couldn't care less about our XX million/year revenues. Literally wouldn't take even basic requests for services. We moved to Keybank who has a much better rep with small businesses, and service (and pricing) has been orders of magnitude better. I'm assuming a similar thing was going on with SVB vs. other large banks.
  - eastbound 4y ago
    > why would big banks not want to compete against SVB by establishing a smaller division that handles startups? Because such startups tend to, when they can’t raise funds easily (=nowadays), withdraw all their cash deposits at the same time (=what’s happening at SVB), which puts it in bankrupt. So, small market, but so much variance in deposits that it’s risky.
- deleted 4y ago
  [deleted]
bpodgursky 4y ago
Big banks do not understand the cashflow situation of startups. They flag standard fundraising as fraud, drug money, or money laundering (or simply won't open an account in the first place).
- yeahsure22 4y ago
  They understand it perfectly well, it really isn’t that complex. You are repeating SVB marketing. Bank of America works with thousands of start ups and I’m sure all the other large banks do as well.
- rickreynoldssf 4y ago
  I have to say, Bank of America was a great bank for my startup. We wouldn't have gotten a bridge loan with them or anything like that but for operating cash management there was never an issue.
- mbesto 4y ago
  More importantly, they know how to offer credit to them.
  - twelve40 4y ago
    do a lot of VC-backed startups rely on credit?
    - icelancer 4y ago
      Convertible debt instruments have become significantly more popular over the last few years.
    - mbesto 4y ago
      Uhhh yes. Most commercially viable businesses at scale rely in credit. If you're making serious money (call it $10M+ in revenue), you very likely have some credit facility with your bank. Whether you use that credit or not, is another thing.
- 4y ago
phendrenad2 4y ago
I wonder if bigger banks don't want exposure to the kind of disaster we're seeing play out at SVB. Maybe SVB is (was) filling a dangerous niche.
af0daert 4y ago
I'd expect that in many cases they are forced to as part of the venture funding offered by SVB. F.e. Secure a $10M venture note (in connection with Series A) but use SVB exclusively for banking.

by db1234 4y ago

frankchn 4y ago

Venture-backed startups are weird in terms of cashflow compared to traditional businesses. They appear out of thin air with no history and millions of dollars. They then constantly burn money in the tens to hundreds of thousands of dollars a month until they disappear or get injected with millions more dollars. Often, traditional banks don't know how to deal with these entities and it sets off tons of alarms in their fraud and risk management departments. SVB and related departments know the business and financial models of startups a lot better and are more willing to help.

deleted 4y ago
[deleted]
twelve40 4y ago
i really wonder if that was a problem. My last startup banked with Wells Fargo for a while all the way from pre-seed to A, and it seemed to be fine. Anyway, my number 1 ask from any bank is not to fail, before anything else, and that didn't really work out great here. If SVB was a top-5 bank it probably would have been bailed out by the govt. Not great, but probably safer for the customers.
bloodyplonker22 4y ago
This makes complete sense, however, why would big banks not want to compete against SVB by establishing a smaller division that handles startups? Obviously, the market is small compared to their usual markets, but there is still a lot of good money to be made.
- frankchn 4y ago
  If the deposits are going on the parent bank's balance sheet, it would be subject to the same controls.
- icelancer 4y ago
  Bank of America couldn't care less about our XX million/year revenues. Literally wouldn't take even basic requests for services. We moved to Keybank who has a much better rep with small businesses, and service (and pricing) has been orders of magnitude better. I'm assuming a similar thing was going on with SVB vs. other large banks.
- eastbound 4y ago
  > why would big banks not want to compete against SVB by establishing a smaller division that handles startups? Because such startups tend to, when they can’t raise funds easily (=nowadays), withdraw all their cash deposits at the same time (=what’s happening at SVB), which puts it in bankrupt. So, small market, but so much variance in deposits that it’s risky.
deleted 4y ago
[deleted]

bpodgursky 4y ago

Big banks do not understand the cashflow situation of startups. They flag standard fundraising as fraud, drug money, or money laundering (or simply won't open an account in the first place).

yeahsure22 4y ago
They understand it perfectly well, it really isn’t that complex. You are repeating SVB marketing. Bank of America works with thousands of start ups and I’m sure all the other large banks do as well.
rickreynoldssf 4y ago
I have to say, Bank of America was a great bank for my startup. We wouldn't have gotten a bridge loan with them or anything like that but for operating cash management there was never an issue.
mbesto 4y ago
More importantly, they know how to offer credit to them.
- twelve40 4y ago
  do a lot of VC-backed startups rely on credit?
  - icelancer 4y ago
    Convertible debt instruments have become significantly more popular over the last few years.
  - mbesto 4y ago
    Uhhh yes. Most commercially viable businesses at scale rely in credit. If you're making serious money (call it $10M+ in revenue), you very likely have some credit facility with your bank. Whether you use that credit or not, is another thing.
4y ago

phendrenad2 4y ago

I wonder if bigger banks don't want exposure to the kind of disaster we're seeing play out at SVB. Maybe SVB is (was) filling a dangerous niche.

af0daert 4y ago

I'd expect that in many cases they are forced to as part of the venture funding offered by SVB. F.e. Secure a $10M venture note (in connection with Series A) but use SVB exclusively for banking.