What the Silicon Valley Bank collapse means for climate tech

raise more capital. There are recent developments the concern a few banks, and you have people like Peter Thor advising clients to pull money out. You get that run on the banks. The government regulator and charge, the FDIC, took control of Silicon Valley Banks as sets as the president. What do you know right now about why this happened. It started with a worry among a small group of venture capitalists and startups that the bank was running shot

on cash. That snowball into a bank run, and within hours the bank's customers had tried to withdraw forty two billion dollars, about a fifth of the bank's holdings. The shortage of cash became so severe that the bank seized normal operations and was taken over by US regulators to limit the damage. The very next day, startups began to worry about how they would pay their staff the following week, and venture capitalists worked through the weekend to stump up

emergency cash. Relief came in the form of US regulators promising that all deposits will be safe, and on Monday, startups could breathe easy as they could access their cash again. But the headache is far from over, particularly for climate tech companies that are readying themselves for explosive growth and need cops of cash. Climate tech has been a bright spot in the last year. While total venture capital investments in twenty twenty two fell, investments in climate tech actually increased,

reaching almost sixty billion dollars. According to Bloomberg an EF. One way to understand the SBB debacle is to experience it through the eyes of a startup founder, and so I spoke with Austin Sendek, the CEO of Ionics, to hear how the bank's collapse pile stress onto his fledgling company. But first to set the scene, I asked my colleague Mark Bourgen to give us the Big Picture view Mark. Welcome to the show, Thanks for having me, and welcome to London. You've just left San Francisco and you now

cover the tech beat here in London. Of course, climate tech is something you've been writing about for some time and you will continue. But what a wreck have you left behind? It seems like I got out just in time. You know. It's funny. We had a story Tuesday night from our UK team about how they're preparing the budget here in the UK, and they were frantically trying to

scrub the terms Silicon Valley from the talk. It just speaks volumes about maybe this place that was shorthand for innovation and an entrepreneurship and phenomenal success might mean something very different. Now, let's just start with the basics. What is Silicon Valley Bank. So Silicon Valley Bank they rebranded the SVB was started in eighty three, which I forty years ago, because it's like this niche and really took

off I think in the past twenty years. Something that would service the area around northern California right that sector, the software industry, or a reliable place where a company just getting off the ground typically turned to their investors and asked, you know, how do we set up payroll? How do we set up a bank? And they would direct him to SVB, which became not just a commercial bank, but put far more in the tech sector. They started

to become a lender themselves. They dipped into providing mortgages. They haven't gotten too wineries I learned we learned about this past weekend, So I think more than a bank, they'd really positioned themselves a sort of integral part of the tech world. I mean there was a partner, Sequoia Capital, its big venture capital firms that equated over the weekend. They're they're collapsed to a death in the family. And

what specifically did it do for climate tech startups? So SBB had focused on climate tech recently as scenario of growth, which is very true when especially in the past couple of years, where a lot of other sectors were we're

falling behind. So I think in addition to their commercial banking, so if a startup comes to them and they just want to park their money and use them as their primary bank, they also provide a lot of what's called venture debt, which is a way of financing a company sort of different than like what you'd say, if a venture capitalist gives you money, there is an equity round. They own a part portion of your company. Venture debt

is basically a loan. It could be like a very low interest rate loan, and it's something for companies that a lot of startups are are moving pretty quickly. They don't have a lot of cash coming in. Often they're not they're losing a lot of money. But what they do need is a lot of capital upfront. And climate companies, particularly ones that are working with hardware batteries trying to build something like research intensive, they need a lot of

upprop capital with really nothing coming in. And you know, they also advertised that they had more than fifteen hundred companies that were climate startups that were their customers. We understand that they also underwrote a lot of solar projects because solar was a big booming industry in the last twenty years. And then they did these other things which

we don't think about. Typically, if you are a startup and you have one hundred million dollars sitting in the bank account with inflation, that money is actually losing its values, So you want some interest to be generated on that and they provided for what it's called a money market account, where that account actually gave you a higher interest rate just for the money sitting in that bank. So now we know that the bank has collapsed and the US government is figuring out a way to deal with what

happens next. But what actually went wrong? Why did it collapse? I mean, it happened incredibly quickly, and for some people that learned about Silicon Valley Bank on Thursday and then

a day later it was gone. My understanding is that in the past several years, Silicon Valley Bank operated with this low interest rate environment, and because they banked with a tech sector, it's different than a lot of traditional banks, in part because a lot of the customers didn't need loans because they were getting tons of venture capital coming in like that wasn't the problem, and so they would

park their money with SBB. What SBB did was they bought a lot of long term bonds and some mortgage backed securities, those things that were sort of familiar for us from the housing crisis, These assets that looked really good and were very good on paper when interest rates were low. And then when happened was a fed because of inflation in the US started to increase interest rates that no longer looked like a great financial bet. Last week, SPB put out an announcement that they were going to

recapitalize and how to restructure their balance sheet. They need to raise more money because their financial position had changed. It's just something that the companies didn't really anticipate any immediate backlash, certainly something that we saw, and so there were companies venture capitalists that had both their money with SVB, but then a lot of their portfolio companies and started to advise our companies to maybe should pull out this

no longer looks like a safe place to bank. It happened very rapidly, where one investor went, the next, and the next their stock started to fall. I think that coincided with a lot of companies either pulling out their deposits or then trying to pull out their deposits discovering that they couldn't, and that just became the snowball effect

where within a day they no longer existed. Now that's called a classic bank run right banking one oh one, which is you think when you have money in your account under your name in a bank, you can always go to the bank and get it. Well, technically, yes, if the bank has that cash available, and ninety nine of the time they do. But when everybody wants their cash at the same time, that is when a bank run happens, because that cash is actually not sitting in

an account untouched. It's being put to work so that the bank can make some money and then provide the services which you are getting for free. And as we learned on Thursday, something like forty billion dollars was withdrawn or requested from Silicon Valley Bank, which had about two and twenty billion dollars of assets. That's a huge amount

of money to be in cashed really quickly. There's a really good Simpsons episode where Bart Simpson, if you recall, demonstrates what a bank run is right where he tells everyone waiting in line that the money is going to disappear and they have to pull it out. Now, what do you mean the breakers out of money in servent you only have enough cash for the next three customers just second here, And that's basically what happened. Like people went to SVB to pull all their money, they discovered

they couldn't, and that just caused mass panic. EONIX is a climate startup using artificial intelligence to search for new battery materials. What the company does could make future batteries cheaper, something the world really needs. The company has raised around three million dollars, of which a big chunk was in SVB. I caught up with Eonix CEO Austin Sendec on Monday evening to find out how svb's collapse has affected him and his company. Now, before I call it the most

stressful week, what was the stress level for you? Like, out of ten? Probably at ten? Okay, so one of the most stressful weeks in your life, I'll just say that. Yeah. So a company in your position, which is just about to get started hire people, is going to need money. And over the past week, we've seen the collapse of Silicon Valley Bank, and you were a customer of the bank, and what transpired ended up being one of the most

us full of weeks of your life. What happened, Well, I think we're all still trying to figure that out. But it was a weekend of uncertainty. So Thursday morning, I woke up to some news that there were questions and concerns about Silicon Valley Bank, and I actually texted my co founder and said he might have asked me first. He said, you know, is this a problem? And I remember saying, Hey, I don't think Silicon Valley Bank's going anywhere, right,

This bank's been around for forty years. And just within a couple hours, after all kinds of texts and emails, they're that really morphed into some pretty serious concern and the calculation really went from hey, you know this is just some online chatter too, it really sounds like the bank's in trouble. So by the end of the day Thursday, we made the determination to withdraw our money. But unfortunately, like many others, we were too late. How much money

did you have in the bank. I won't say exactly how much money we had in the bank, but I will say that we were over the FDIC insured limit, so there was uninsured deposits there in the bank. FDIC is a Federal deposit insurance corporation created in nineteen thirty three after the Great Depression. Today, it guarantees deposits up to two hundred and fifty thousand dollars. Anything above that

amount is uninsured. That means there's no guarantee it will be returned if you have a million dollars in the bank, Well, lucky you. But if the bank goes under, you could lose seven hundred and fifty thousand dollars. If you have ten million dollars, well you get the picture. And say he had lost the money, what would have happened to you as a company. Well, you know, we're small and we're early and that would have been a really severe impact.

We had money across institutions. We had money to continue to fund our operations, so that made us relatively fortunate. I know that there were other entrepreneurs in early stage companies who didn't know if they could make payroll on Monday. So we knew that we could. But the long term outlook if that money had disappeared would have been pretty bleak.

And so when you learn a problem on Thursday morning, you're like, well, online chatter, maybe this is something when you should think about, You think about it, you talk a little more in your life. Oh, maybe there's a real problem, and so you try to take your money out.

What happens when you try to do it. I think one of the interesting things that will remember from this incident is that this was probably the first bank run in the era of virtual banking, right, so no one's waiting in line to pull their money out of the bank. People are logging in and wiring money out within a minute.

So this is happening very quickly. And Thursday afternoon there's a brief moment where there's a really serious discussion that we're having internally, which is there's some advice that we should pull the money out, but there's this sort of ethical consideration, which is, you want to support the bank. Silicon Valley Bank has been a pillar of the technology industry and really of the entire Bay area for a long time, and so there's you know, you don't want

to sort of leave the bank there. But then there's this very serious concern of, hey, if this does happen, if the bank does collapse, you don't want to have our money stuck in there. And it was a little bit sort of prisoner's dilemma, right, You're trying to game theory your way through this, and at the end of the day, my obligation as CEO of the company is

to our shareholders and to protect our shareholders. And so unfortunately that led to the very difficult determination that we should really get our money out of here before it's too late. By the time we processed a wire transfer out of the bank or tried, that was some time around four o'clock Pacific, and so that's after basically the markets had closed that day. We assumed that it would

go through first thing Friday morning. The bank went into receivership around noon the following day, and that wire basically never made it out. So you prepare a wire and it doesn't go through, that means your money is stuck. What was going through your mind when that happened. So we didn't really know that the wire was not going through until Friday. When it doesn't go through, I think suddenly, Okay,

how much money do we have access to? But more importantly, everyone started getting very familiar with the FDIC and the process of liquidating banks and speculating on you know, is it eighty cents on the dollar, is it ninety cents on the dollar? Is it ten cents on the dollar? The outcomes could go so many different ways that you almost don't want to speculate. FDIC, the Federal Deposit Insurance Corporation. Did you know this thing existed before last week happened?

I did know about the work of the FDIC and about the protections that they have for banking customers. I was not aware of the efficiency with which they work, and perhaps of the magnitude of their dedication to people and businesses, and so I was pleasantly surprised over the weekend to learn more than I already knew about the FDIC. Well,

pleasant is an interesting way of describing it. You learned that you had two hundred and fifty thousand dollars that was insured, and you would definitely get that much money, but you had a lot more in there, and you didn't know what would happen to the rest, right, And there's been some discourse in the time since of hey, if you knew your money was uninsured, why would you leave it in the bank? Right? You know, the FDIC will reimburse this two hundred fifty thousand dollars, but why

anything above that? And that's a fair question I think everyone's asking themselves about in hindsight. But I think the reality is until a few days ago, bank collapses just didn't seem like they were on the horizon, and reputable banks like Silicon Valley, you know, especially not So what was the weekend like like there was nothing you could

have done given you money was stuck. But what were the discussions you were having with your team, with your investors, with any other interesting people that would have helped you. It seemed to me the most common conversation, not just within our company but among startups like us, was what do we do in the short term? Can we make payroll next week? And the message that I shared with our team is we're relatively fortunate that we can that we don't expect to have any short term disruptions in

that sense. Lots of phone calls, talking with investors, with teammates, with family that was impacted, and plotting our way through different scenarios, timelines for money to come back, different amounts from money to come back. So Sunday afternoon, there's an official announcement from the FDIC and other federal bodies saying that they will find a way to ensure that depositors money will be safe. It's light on details, It's unclear what it means for the depositor apart from the fact

that the money will eventually come to them. Monday comes along. What do you do So Monday comes along and we have access to all of our funds the insured and uninsured. I was amazed at just how quickly that access had been restored. We had to make another determine nation, which is what's going on in the macroeconomic picture, what's going on with banks. We need to make sure that this

money is safe. So we just said, hey, we need this money to be in a fortress at least for the time being, and we think the safest place for this to go is into sort of the biggest banks possible. So the position you ended up taking on Monday is different from the one you were contemplating on Thursday, which is, if we draw our money out, there'll be a bank run and it'll collapse. So maybe we shouldn't do it. But Monday comes along and you do decide to take

your money out. So what made you take that decision and not support the bank, which was a moral position you would ready to take Thursday morning. Yeah, it's a difficult position. The determination on Monday to move that money from a regional bank to a large bank is not an easy one because I really believe in the value of community banks, in regional banks, and I think they serve a very valuable purpose in society. But the most important thing for me to do is to protect the

shareholders of the company. And once we saw the bank actually go down, that changes things because now you're scared. You know. Now it's it's not an abstract game theory calculation, it's a real reality after the break. Why was SVB so important to startups? And who will fill the gap left by the collapse. Let's take a bigger step back and tell us when it is that you first became a customer of Silicon Valley Bank and why did you

choose to do it. Sure, you begin working with Silicon Valley Bank about a year ago, a little bit less than a year ago. And I think it's first important to note that Silicon Valley served the communities of the broader Bay area. And this is not a startup technology entrepreneur bank. This is a bank that folks from all walks of life are using for personal and business finance. But that being said, speaking as a technology founder, Silicon Valley Bank always seem to get startup life in a

way that other banks maybe would not. What do you mean exactly when you say that they understood startup life? Yeah, so the profile of a healthy, venture backed, early stage technology company looks so different from the profile of other types of early stage companies that you might see typically outside of the Silicon Valley technology world. Early stage companies

are typically growing very quickly. There's often a period where they're not making a lot of money, and in some cases very early on, they're building without even a firm knowledge yet of who they're going to sell to. And in the bank balance sheet, it's basically looking like a big chunk of money comes in and then it's being drawn out, drawn out, sometimes very very quickly, because the company is going through this growth phase exactly, so it's

not a weekly deposit of revenue. And I think the banks sort of understood that model, and one way in which it understood it, or maybe one way in which that understanding could be seen, was through their venture debt programs, where if an early stage company had raised enough external equity capital that effectively de risked the company to some extent.

Silicon Valley Bank was known for giving loans to these early stage companies, and I think being confident giving that sort of loan requires you to be in the community and to sort of know what's going on on the ground. And Noah differentiates a good investment from a bad one. CBS Venture Debt program is one of the reasons it was so attractive to startups. Most loans offered by banks involved some kind of collateral. For example, if you take out a mortgage, the house is the collateral until you

pay off your loan to the bank. Early stage startups usually don't have much to offer as a collateral. That's what makes ventured at higher risk than most loans, and a leap of faith not every bank is willing to take. I think it remains to be seen whether this contributed to the bank's demise. Frankly, I think the early indications are that it did not, that it really had more to do with rising interest rates and a general decline of venture funding going into the pockets of these companies.

So I don't want to necessarily say that the bank had it all figured out. I think that remains to be seen. But I think it made Silicon Valley Bank unique, and as a founder, you feel like you have potentially someone who who just sort of gets the business that you're trying to build. Silicon Valley Bank is a bank for many types of startups, but climate tech startups have

been growing in number, especially in recent years. So if we look at it from a climate tech perspective, what do you think a collapse of a bank like this does to the community. Looking at sector wide, we're at a point now where these early stage climate companies have many of them have raised a lot of money. We're going into an environment where venture capital seems to be drying up, and so there's a broad sense that you really need to protect that money. You need to hunker

down and build. And there's some companies who have just received giant grants from the Bipartisan Infrastructure Law and the Inflation Reduction Act here in the US need to protect that money. So I think it's a tough time for this to happen. It's always tough, but I think we're at a point where that having money in the bank is something you don't want to take for granted. Often. Thank you so much for taking the time. I should

note we are talking Monday afternoon, Pacific time. The news has certainly been constant about Silicon Valley Bank over the past few days, and who knows what comes in the next few days. But it is really good to be able to get a perspective of what it was to be a startup that was dealing with this crisis. Well, it's a pleasure to talk with you, and hopefully there won't be anything else newsworthy by the time this episode airs. So Mark, we are talking on Wednesday, fifteenth March, and

startups have got their money back. Those deposits ended up essentially being insured by the US government. What exactly did the government do to get this panic to subside? They stepped in to basically guarantee every single depositor, So they didn't bail out the shareholders of SVB, but they did promise that anyone who had money with the bank it

would be able to get it out. Yeah, we had startups panicking over the weekend, like how are we going to pay role on Monday and comparing for all the sort of worst case contingency, so that so far seems to be avoided. So right now there's this sort of complicated dance of trying to sell off the bank potentially one piece or different parts, and so someone could take over the commercial banking operation, restor B, someone else could

take over sort of lending operations. They have different kind of components and it's likely that they're going to be split up and sub had branches in several countries in the UK. That was actually purchased outright by HSBC for one pound, but we reported the HSBC is injecting at least two billion pounds of capital. The same sort of situation here where they're guaranteeing that any companies that were banking with SVB will continue, You know, it's not necessarily

going to be. HSBC is a very different bank than SVB, so we don't know how here in the UK they'll necessarily treat to customers or sort of operate the same way. In the past year, because of the financial situation, venture capital funding itself has fallen. However, the bright spot was climate tech funding, which continued to grow. Does that get affected now with what's happened at SVB. Yeah, I think

they answered for that. We'll take some time, certainly, like how well, to see how they sort out the situation in the US. I do think there are certainly concerns that whatever bank steps in might not look at climate tech the same way, might not be willing to make as aggressive a loan similar loans, and then how it impacts I think the kind of the domino effect it has with venture capital when you had a bank like SVB being willing to inject its own capital on a

lot this venture debt. I think that really changed the outlook for a lot of the VC firms, and so there's a likelihood that could be much more cautious. I think a lot of climate tech companies, after they get to a certain stage of growth, they still need a lot of money to invest in. If you're building a something a battery plant or carbon capture facility, that requires a lot of capital before you get money from customers up front. And that's where SBB I think played a

very significant role. And that's just an opening question about what happens there. So when we go and interview CEOs, you know, we don't typically ask them what Wi Fi service they use, because why would you There's a Wi Fi service, it works, and they do their job unless it doesn't. Right, if there was a data breach because of the Wi Fi service they use, we will be asking CEOs what Wi Fi service do you use? And that's kind of the thing that we're going to have

to do with banks now. You know, we were in Paris yesterday looking at climate tech startups and we had to ask the question, what are you doing about your banking now. And one of the founders of a floating solo company told us that she, even though wasn't banking with SBB, did have money in some small banks, and given what had happened over the last few days, has pulled that money out and put it in a big bank because that's the flight to safety. That's what she

feels would be good for her company. But do you think that the whole created by SBB's collapse could be filled by another bank or many banks providing the different

services that SBB seemed to provide for startups? I mean, I don't think like some of the underlying the situation that a lot of these climate companies are operating and hasn't really changed, right, Like, there are still ESG targets every single company needs to meet, there's still this rushing deadline to net zero, and there's still a phenomenal growth opportunity. And so I think if you're a bank that's sort of operating with just purely sort of financial logic, I

do see that they could step in. I guess the question would be how much of was SEB the climate bank because it was willing to because it had this network of relationships right across the Silicon Valley and other tech sectors. Or was it the Climate Bank because it was willing to make bets at other banks didn't make. And we're talking at this time where of course all of this bank money is private capital, but there's a huge amount of government capital that's going to be injected

into this sector. There's the Inflation Reduction Act in the US,

there's the Green D in Europe. Does that money become more important now that you don't have access to easier capital through banks like SBB certainly, like we have already seen that the IRA's been implemented in the US right there kind of it has immediate impacts on dozens of different sectors, and where like just products and financing is so much easier for companies to going into the space, and we see in Europe companies that are like considering making a jump for that reason, and so I think

those will become much more vital to the company's future, particularly if raising money from certain from venture capital or in venture data is it's no longer on the table. Thanks Mark for your time. Yeah, thanks for having me. Svb's collapse is a rapidly evolving story. For all the latest coverage, visit bloomboog dot com or read the articles we've linked in the show notes. Thanks for listening to Zero.

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