What the Silicon Valley Bank collapse means for climate tech

  • Silicon Valley Bank was the go-to bank for startups looking to speak to bankers who understood startup life and balance sheets, including climate tech startups.
  • Specifically, Silicon Valley Bank has been the “1,000 pound gorilla in the room” for providing venture capital debt to startups, which means lending to startups that are still raising funds from investors.
  • But since the launch of SVB, the climate space has grown, and many financiers will seek to serve the climate community in the future simply because it’s good business, participants in the space believe.

A view of the Silicon Valley Bank headquarters in Santa Clara, California, after the federal government intervened in the bank’s collapse, March 13, 2023.

Nikolas Liepins | Anadolu Agency | Getty Images

Silicon Valley Bank was the go-to for startups looking for bankers who understood startup life and balance sheets. This was especially true for the cohort of startups being built and scaled to fight climate change.

After a very stressful weekend for many startup founders and investors, banking regulators have come up with a plan to support SVB deposits, ensuring depositors won’t lose their money.

Founded in 1983 specifically to help startups, SVB had a strong, established climate business, with 1,550 climate tech and sustainability customers, according to its website.

“Silicon Valley Bank had a very good reputation in the field of energy transition and was ready to put its money where it belongs, unlike many of its peers,” said Mona Dajani, head of renewable energy law and infrastructure at Shearman and Sterling.

“Many clean energy companies have turned to SVB because they had an established, dedicated clean energy practice and were perceived to have more clean energy experience than the most regional and big bulge peers,” Dajani told CNBC.

But the climate space has grown since SVB’s inception, paving the way for new lenders to serve the market.

“Fundamentally, the companies that are coming out of the climate right now have real strength. They’re founding companies, and people are going to want to lend to them because it’s good business,” explained Katie Rae, CEO of The Engine, an accelerator and venture capital fund focused on challenging technologies, including climate startups.

“Just in the last three days I’ve probably had 50 emails in my inbox from different providers saying, ‘Hey, I know SVB are out of shape. We also do risky debt. So many people are going to emerge,” Rae told CNBC in a phone conversation on Tuesday.

Wind turbines operate at a wind farm, a key energy source for the Coachella Valley, February 22, 2023 near Whitewater, California.

mario tama | Getty Images

Venture capital-backed startups are an unusual type of business. In their early days, they might not have cash, revenue, or even customers. Instead, they rely on venture capital funding, where investors offer money in exchange for equity, hoping startups will prove their technology, find customers, and eventually become giants.

Providing banking services to this type of client requires special skills and an appetite for risk.

“No one understands startups quite like Silicon Valley Bank and how to lend to them,” says Zachary Bogue, longtime tech investor and co-founder of DCVC.

“I envision a startup’s application being simplified wiped out by a major bank’s risk committee,” Bogue told CNBC.

That was exactly Bill Clerico’s experience in May 2009. When Clerico moved to Silicon Valley with Rich Aberman to expand their fintech business, WePay, they had a Bank of America small business account, but the account n didn’t have the services the startup needed. .

“Silicon Valley Bank realized that even though we might only have $10,000 in deposits at the time, we had a lot of potential,” Clerico told CNBC.

It turned out that SVB was right to bet on Clerico. WePay was acquired by JPMorgan Chase in December 2017.

“That early investment in our relationship has paid off,” Clerico told CNBC. “Over time, our deposit balances have grown into the hundreds of millions, we have borrowed millions in venture capital debt from them and processed billions through their accounts.”

In January 2022, Clerico launched Convective Capital, a $35 million venture capital fund investing in wildfire technology. He fervently hopes that someone can fill the void left by the SVB.

“Some people may confuse their balance sheet meltdown with the failure of this startup-driven business model – but in fact, I think startup banking continues to be a great business and a role someone needs to fill” , said Clerico. CNBC. (Notably, Clerico is an angel investor in Mercury, a startup working to fill that need.)

“I hope SVB and their business model will persist in some form,” Clerico said.

In the climate technology ecosystem, SVB has played a particularly important role in lending to companies with venture capital funding, known as “venture debt”. It’s critical for startups that aren’t yet generating enough cash to be self-sufficient, especially when they’re between funding rounds.

“It adds a bit to the capital they’ve raised, lengthens their runway a bit, and gives them more time to grow their business,” Rae told CNBC. Venture capital debt can add three to six months to the lead companies already have, Rae said.

“There are other places that do risky debt, but Silicon Valley Bank was the £1,000 gorilla in the room,” said Ami Kassar, CEO of business lending consultant Multifunding.

“The current concern is that even where deposits are full, credit facilities for businesses with SVB are likely no longer available, and this is an area where they are critical,” Dajani said.

That said, lending to venture-backed companies is a riskier business than traditional banking, Kassar told CNBC.

“I always wondered how they managed to get regulators to allow them to have such a concentration of risky debt,” Kassar said.

Solar panels are installed at the University of California, Merced Solar Farm in Merced, California on August 17, 2022.

Nathan Frandin | Reuters

SVB was an early proponent of climate technology, helping many climate technology companies get started. But as the sector has matured, participants believe that other financiers will be more willing to lend to these companies.

“Silicon Valley Bank’s early support and commitment to backing climate tech startups has certainly helped catalyze the huge capital migration that you’re seeing happening in the sector right now,” said Adam Braun, founder of the climate startup Climate Club, to CNBC.

For example, SVB funded 60% of community solar projects, said Kiran Bhatraju, CEO of Arcadia, a climate technology company that, among many services, helps people get connected to community solar projects.

In this, the bank “has been a pioneer in climate banking,” said Steph Speirs, co-founder and CEO of Solstice Power Technologies, which has built technology to help connect people to community solar projects.

“But renewables have come a long way in the past decade and now there’s a much wider universe of potential financiers looking to get on board,” Speirs said.

This is also what Braun expects to see.

“I think we’ll see many more institutions create dedicated climate practices and funds to support emerging startups in this space,” Braun told CNBC. “While SVB may have been a frontrunner, I don’t think the events of the past week will diminish the desire to fund and support emerging companies that are advancing the rapidly growing climate tech sector.”

First Republic and JPMorgan are “increasingly making this category a priority,” Chauncy Hamilton, a partner at venture capital firm XYZ, told CNBC. “More and more banks are paying attention to the climate,” Hamilton said.

Mark Casady, founder of venture capital firm Vestigo Ventures, agrees.

“Climate solutions are too powerful a force to be stopped by a bank failure,” Casady told CNBC. “The need is critical and time is not on our side to find solutions. Since this is a basic need, it will receive more support than less.”

However, this transition will take time. And for companies fighting global warming, time is the ultimate enemy.

“I expect the big banks to eventually step in and provide the financing the industry needs to move forward – these projects are just too attractive and the promise of climate technology is too great. But it will take time and delays can be costly in the fight against climate change,” Bhatraju told CNBC.

“With all the new investment in climate technology and the opportunities coming from the IRA [Inflation Reduction Act], there’s a ton of momentum. We don’t want to lose that,” Bhatranju said.

Leave a Comment