With new offices in Germany, a new lending licence in Canada and a JV bank in China, SVB is ‘venturing’ forth to help fintechs change the world, says Head of Global Treasury and Payments Advisory for the UK and Europe, David McHenry
Silicon Valley was once described as being populated by eccentrics and dreamers – but there’s one bank that made it its business to take their ideas seriously.
Born, as the name suggests, in the technology foundry of Santa Clara, California, Silicon Valley Bank (SVB) shares a zip code with some of the most powerful big tech companies in the world and has funded and banked 30,000 startups which aspire to being just like them. That’s involved making shrewd – sometimes brave – decisions over which runners to back.
Take Coinbase, for example. SVB was the only bank prepared to offer services to the crypto innovator when it launched in 2012. One of Coinbase’s early investors, Brad Stephens, recently said: “Coinbase was the only crypto exchange with a bank account. Had SVB pulled their banking relationship, Coinbase would have died and crypto wouldn’t have taken off for years.” Now reportedly valued at $8billion, Coinbase has just launched its crypto credit card in six EU countries and, although no longer banked with SVB, it represents the kind of company with a shape-shifting influence on world economies that the bank has an appetite to support.
Such startups are inherently risky; negative cashflow, a lack of capital assets, with nothing to show to investors beyond an idea, they are a banker’s least favourite client. Indeed, they represent only around six per cent of the SVB loan book. But that’s not the only – or even the principle – way that it facilitates entrepreneurs.
Launched 36 years ago as a bank that focussed on collecting deposits from businesses financed through venture capital (VC), it now banks and finances a growing number of venture capitalists themselves. With around 600 VC firms on its books, loans to private equity and VC clients make up just under half of its global portfolio. So, not only is it a lender of first resort for high-growth, high-risk startups and scaleups, but it also finances the financiers whose capital repays those loans. For SVB, it’s a virtuous circle and has contributed to its own stock performing more like a tech company’s than a bank’s, traders no doubt impressed by its above 23 per cent return on equity and a doubling of net income since 2016. Fortune clearly favours the bold.
The bank now has more than $64billion in assets and works well beyond the Valley with companies at every stage of development – from startup/early stage (pre-Series A) clients, for whom it offers banking and currency services, to venture and growth stage (providing venture loans and finance options), and late stage companies (for which it provides cashflow lending, acquisition finance and help with leveraged buyouts.
One of the most successful of the bank’s partnership decisions was Remitly, named in July 2019 as a World Economic Forum ‘Technology Pioneer’. It earned the title for the impact that its mobile money transfer service, which offers more than 600 send-to-receive corridor combinations, is having in 40 countries across Africa, Asia, Europe, the Middle East and South America. Now valued at $480million and with volumes growing at around 33 per cent a year (it currently moves $6billion around the world annually), Remitly has been newly promoted to the Forbes Fintech 50, too. Clearly knowing a good thing when it sees it, SVB has also sunk significant funds into Remitly’s rival WorldRemit.
Fintech – and within that the international movement of money – represents a key focus for SVB in almost all of the geographies in which it operates, but especially in Europe.
“We follow where the technology ecosystems are evolving, where the investors are going with their funds,” says David McHenry, SVB’s head of global treasury and payments advisory for the UK and Europe, who is one of 300 staff in the expanding London office.
“We bank VCs in the US, we have a banking licence in London, a lending licence in Frankfurt [where it has just opened a new office], a new lending licence in Canada and a joint venture bank working out of Shanghai, as well as offices in Hong Kong and Israel to bank these amazing companies. We get excited about what they can do to change the world,” says McHenry.
Money might make the world go round, but it needs payment rails to run on and how they develop is of key interest to SVB.
“When we look at VCs or private equity investing into companies or any of our technology banking clients which are making developer or supplier payments, cross-border transfers have always been a challenge,” says McHenry. “In particular, not having the insight into where that payment is and when it’s going to land, what it is going to cost and what’s going to remain of the amount that you sent at the end of the day. So, things like SWIFT, where you’re making it easier for these payments to go through the banks, with more tracking information, fewer lifting fees, and more insight across the spectrum, are a huge step forward for legacy wires.
“But blockchain is also an incredibly cool technology that has definitely moved from science projects into some reality. We’re looking at how that could change things like global trade, managing assets or powering payment, even though there are still questions about throughput and scalability for different models. Mastercard and Visa have amazing payment platforms, for example, where they don’t need to rewrite their transaction pieces right now, because they have a tonne of throughput and it works. But, as new developments come along, they might well pick blockchain technology to build some of their core underlying structure.”
SVB itself had a hand in mentoring PayStand, a blockchain-based, payments-as-a-service platform, which took part in Class 8 of Commerce.Innovated, a US accelerator programme focussed on growth and innovation in finance, which gives access to SVB, First Data and their networks. Launched in 2014, the scheme has worked with 32 commerce, payments and other fintech startups and, since graduating, more than half have raised funding or been acquired. PayStand itself went on to raise $6million in Series A funding to scale its model.
Fast and frictionless crossborder and other payment systems are not just good investment targets, they are also important to SVB’s own journey as a bank for entrepreneurs.
“We have some of the most demanding clients in the world that are all building great technologies and iterating very quickly,” says McHenry.
“Whether it’s SWIFT gpi integrations and host-to-host, or building out our application programming interfaces (APIs) that are powered by open banking standards in the UK, or other API standards that we have in the US for developers, we’re balancing out [our legacy technology] with ways that our clients want to integrate with us.”
In its last annual report, SVB acknowledged that it could not itself be seen to be behind the curve when it came to adopting the latest technology, telling stakeholders that ‘a failure to introduce products or services that the market demands… could have an adverse effect on our business, results of operations, growth prospects and financial condition’. So, it’s taking the initiative. This year, the bank introduced a new Innovators credit card for startups, which offers ‘venture-friendly approval’ while protecting the holder’s personal credit score and scaling the amount of credit available with the growth potential of the business. In its investor briefing it also said it is committed to building a new digital banking platform.
Are we nearly there?
Global venture capital activity continues to break records and, according to SVB’s own survey of UK companies, this year 50 per cent will look to VC for funding. There is a note of caution, though: figures suggest that investors are becoming pickier, preferring to back proven, later-stage companies with the capacity to generate lasting scale and enduring profits. While the first half of 2019 saw investment in start-ups increase by just over 45 per cent year-on-year, according to Innovate Finance, 85 per cent of that came from later stage venture capital and private equity growth investment rounds, with angel, seed and early VC rounds accounting for 15 per cent. Indeed, Kausik Rajgopal, a senior partner at global consultancy McKinsey, recently warned it could be the ‘endgame’ for the sector if early-stage investment dries up, saying ‘loss-making firms with models based on burning through venture capitalists’ cash are doomed’.
Against the background, SVB promises clients that it will strive to increase their probability of success. For companies like London-based regtech ClauseMatch, for which the bank agreed a $2.5million loan package in May to support its growth in Europe and Asia, and Canadian startup Xanadu Quantum Technologies, which the bank recently helped raise $32million in venture funding to build the world’s most powerful computer, that promise means ‘fintech eccentrics’, wherever they are,
can continue to dream big.