Cybersecurity Spending , Finance & Banking , Industry Specific

SVB Collapse Is 'Self-Inflicted Gunshot Wound' for Startups

Silicon Valley Bank Crash Will Make Getting Loans, Credit Lines Harder for Startups
SVB Collapse Is 'Self-Inflicted Gunshot Wound' for Startups

The sudden downfall of Silicon Valley Bank - the second-largest bank failure in U.S. history - will make it harder for cybersecurity startups to get loans and credit lines, said one prominent venture capitalist.

See Also: Software Supply Chain Platform for Financial Services

Founded in 1983, Silicon Valley Bank's four decades of work with startups meant it was willing to extend money to early-stage firms who would have gotten the cold shoulder from traditional banks. The bank was one of the nation's top commercial banks, with $209 billion in total assets at the end of 2022, according to the Federal Deposit Insurance Corp. Regulators pulled the plug on SVB after it failed to find a buyer, and the FDIC took over its assets and liabilities. It was the worst collapse since the failure of Washington Mutual in 2008 during the height of the global recession.

"This is a self-inflicted gunshot wound. This is various elements of the venture community killing their best friend," Bob Ackerman, founder and managing director at AllegisCyber Capital, told Information Security Media Group. "This is people panicking. People that told the bank to trust them turned around and frankly stabbed the bank in the back when there was absolutely no need or no reason. They created this problem."

Silicon Valley Bank was the 16th-largest bank in the United States by assets at the end of 2022, but Ackerman considers it the most important to the U.S. economy from a strategic perspective given its focus on the startup community. The bank hoped to raise $2.25 billion in a new stock offering this week but was unsuccessful, which resulted in its stock nose-diving and customers switching banks en masse (see: How the Economic Downturn Has Affected Security Funding, M&A).

Making Payroll, Obtaining Loans Now Tougher for Startups

The most pressing concern for some Silicon Valley Bank customers will be making payroll without access to funds from their accounts. All insured depositors will have access to their insured deposits by Monday morning, while uninsured depositors will receive an advanced dividend within the next week, the FDIC said. Ackerman always directs Allegis' portfolio companies to shift capital around so it's fully insured.

"This is a self-inflicted gunshot wound. This is various elements of the venture community killing their best friend."
– Bob Ackerman, founder and managing director, AllegisCyber Capital

In the longer term, Ackerman said, whichever institutions purchase the assets of Silicon Valley Bank are unlikely to have the same level of understanding or trust in the venture community. As a result, early-stage startups that had depended on SVB for loans to manage their cash flow and growth will now find themselves stuck at institutions less predisposed to lending money to unprofitable entities, he says.

"How many banks go out and make loans to companies that are losing money?" Ackerman said. "Those startup companies that were losing money creating the Apples or the Oracles or the CrowdStrikes of the future would have had a very difficult time banking with traditional commercial bankers. You needed somebody that understood the relationship between innovation and risk. SVB mastered that."

Ackerman said conventional banks that were happy to work with high-flying startups in good economic times pulled back from early-stage companies during down economic cycles in an effort to reduce risk. But Silicon Valley Bank continued to support startups even in bad economic times since it understood how to assess and manage risk at startups and formed tight relationships with the venture community.

"When all the other banks cut and run, Silicon Valley stood by their commitment, stood by their relationships, demonstrated their character and really allowed the startup community to manage its way through financial crises," Ackerman says. "They became a domain master."

Ackerman said that Silicon Valley Bank had told him that more than 500 cybersecurity companies were banking with SBV, and he hopes the new owner will hold onto the bank's existing employees. Given Silicon Valley Bank's longevity in the industry, the bank's relationships today extend well beyond the startup community and include some of the most powerful companies in cybersecurity.

Silicon Valley Bank's Massive Footprint in Cybersecurity

Silicon Valley Bank's willingness to lend money to venture-backed startups with limited cash flow made the institution appealing to cyber vendors, and logos for CrowdStrike and Snyk were splashed prominently across the "Enterprise Software" section of the bank's website. The regulatory filings of publicly traded security firms offer a sense of just how many companies have worked with Silicon Valley Bank.

Perhaps no one in security had a tighter relationship with Silicon Valley Bank than CrowdStrike, which established a $150 million revolving line of credit with the bank in April 2019, two months before the $2.24 billion endpoint security behemoth's initial public offering. Then in January 2021, CrowdStrike expanded the credit line to $750 million and pushed the maturity date out from 2022 to 2026.

CrowdStrike said late Friday that its revolving credit facility remains undrawn and that the company doesn't foresee a need to access that facility. The company said it diversifies risk across more than a dozen financial institutions, and 90% of CrowdStrike's funds are held in large global institutions. The firm's stock was down $1.96 - or 1.61% - to $119.72 per share, which is the lowest it has traded since Feb. 24.

Similar to CrowdStrike, Sumo Logic had a credit line with Silicon Valley Bank since January 2016. The $300 million data analytics vendor amended its agreement with Silicon Valley Bank in February 2021 - five months after its IPO - so that it could borrow up to $50 million. During the fiscal year ended Jan. 31, 2021, Sumo Logic borrowed $24.3 million from Silicon Valley Bank and subsequently repaid the balance (see: PE Firm Francisco Partners to Purchase Sumo Logic for $1.7B).

Sumo Logic agreed last month to be acquired by private equity firm Francisco Partners for $1.7 billion, and it didn't respond to an ISMG request for comment Friday. The company's stock is down $0.36 - or 3.04% - to $11.50 per share, which is the lowest Sumo Logic's stock has traded since Jan. 25.

Rapid7, meanwhile, brought on Silicon Valley Bank in December 2021 as a new lender in its revolving credit facility alongside KeyBank, Citizens Bank and City National Bank. Silicon Valley Bank committed $21.5 million to the $685 million vulnerability management vendor's $100 million revolving credit facility. Rapid7's stock is down $3.33 - or 7.25% - to $42.61, which is the lowest it's traded since Jan. 31.

Silicon Valley Bank also participated in a March 2021 $100 million revolving credit facility for KnowBe4 that was led by Bank of America. The $247 million security awareness training vendor was acquired last month by private equity giant Vista Equity Partners for $4.22 billion. KnowBe4 declined to provide an on-the-record comment to ISMG (see: Vista Equity Bids to Take KnowBe4 Private at $4.2B Valuation).

Snyk founder and President Guy Podjarny participated in a case study with Silicon Valley Bank in May 2020 and recorded a five-minute video at SVB's offices describing how the bank had fueled the application security startup's growth. Snyk started banking with SVB in the United Kingdom and continued working with the bank after expanding into the United States, Podjarny said. Snyk didn't respond to requests for comment Friday.

"It was great to work with a team that understood what it meant to be in our growth cycle," Podjarny said in the video. "It wasn't around the exact metrics, but rather about the trajectory and how well was the startup doing."

About the Author

Michael Novinson

Michael Novinson

Managing Editor, Business, ISMG

Novinson is responsible for covering the vendor and technology landscape. Prior to joining ISMG, he spent four and a half years covering all the major cybersecurity vendors at CRN, with a focus on their programs and offerings for IT service providers. He was recognized for his breaking news coverage of the August 2019 coordinated ransomware attack against local governments in Texas as well as for his continued reporting around the SolarWinds hack in late 2020 and early 2021.

Around the Network

Our website uses cookies. Cookies enable us to provide the best experience possible and help us understand how visitors use our website. By browsing, you agree to our use of cookies.