The recent failures of Silicon Valley Bank (SVB) and First Republic Bank understandably spurred concern among industry and regulatory leaders about the health of the overall banking industry. Certainly, investigating the reasons leading to their collapse is important so we can identify and prevent it from becoming a larger trend.
The reason to prevent future losses of similar banks, however, has microeconomic impacts that go beyond the dollars-and-cents and market-confidence impacts the banking and investment community are most concerned about.
As a digital health startup investor based in Silicon Valley with deep relationships with both SVB and First Republic, I believe the overall banking industry is likely to weather this period of macroeconomic turmoil. What concerns me and my colleagues more, however, is that startups may be reluctant to seek relationships with banks similar to SVB and First Republic due to concerns over future failures and loss of capital.
An old-fashioned problem for high tech
At a high level, SVB and First Republic were similar to other “community” banks that have been acquired by larger entities in recent decades, although serving a rarified and specialized entrepreneurial customer base. The new ownership does not necessarily mean service quality will suffer, but concerns have emerged given new SVB owner First Citizens reportedly laid off nearly 500 employees in its commercial bank division less than two months after acquiring the troubled bank.
To study the service impact of these acquisitions, researchers in 2022 surveyed more than 300 commercial customers of smaller community banks and national, market-holding institutions and concluded that overall service quality was perceived as higher performance at the smaller banks. Customers also characterized smaller community banks’ tangible services, as well as intangibles such as reliability, responsiveness, assurance and empathy, as higher performance.
Even with the recent bank losses, there are still other similar smaller institutions serving IT and digital health startups. Based on our experience, the following is why founders should consider them.
Expertise. Despite the $105 billion in startup investment that flowed into Silicon Valley in 2021, it can still feel like a small community of investors and startup founders. Banks like SVB and First Republic had professionals who were plugged into that community and had specialized knowledge and experience working with startups, including those in the health care and life sciences industries. Digital health is unlike other IT markets given the regulatory, data security, and clinical research intricacies. Bankers who have worked with digital health companies understand those unique challenges and can connect founders with experts who can help overcome development obstacles.
Financial support. Since digital health VC funding stabilized in 2022, startups have been increasingly required to deliver greater evidence of their solutions’ efficacy and ROI to land investment. Research, however, is expensive and not every bank or firm is willing to financially support a startup with a limited evidence base. Not only did SVB and First Republic have deep connections in the investor community, but they also offered services such as lines of credit, venture debt, and term loans to help startups with daily operations and near-term obligations.
Personal service. Due to their size and focus, SVB and First Republic had a reputation for delivering a higher level of service and more time for their digital health startups for education and guidance on growing their companies. Their familiarity with the natural lifecycle of startups also allowed them to more easily cater their services to a company’s needs at each stage of growth and maturity.
Keeping the momentum going
Early-stage digital health startups may have only one or two founders, no recurring revenue, and heavy R&D costs. That is why these companies seek funding from venture capital firms like ours, but they also need banking relationships. A year ago, I could refer one of our companies to a contact at SVB or First Republic to open an account or line of credit. The banker could then connect those founders with another investment firm that might be interested in funding their company. This cycle repeated itself over and over throughout the years, helping companies grow, overcome hurdles, and reach and surpass their business goals. These hyper-local, hyper-focused relationships supported the entire venture ecosystem and offered significant value to all of the constituents involved.
That said, digital health founders should continue to forge mutually beneficial relationships with banks, both small and large. Regardless of which bank they choose, entrepreneurs should protect their company’s financial integrity and access to capital by following a diversified strategy:
Put eggs in multiple baskets. Opening accounts and lines of credit and securing loans from multiple banks can minimize the risk of a business interruption if there is another bank failure.
Consider non–traditional capital sources. Venture debt and lines of credit are not the only ways to ensure timely access to working capital. Digital health startups should consider investing in asset-backed securities that can be liquidated quickly to fill short-term needs. These securities offer greater assurance that capital will be available when needed and also provide protection against loss of capital in the event of an individual bank failure.
Seek investor guidance. Many digital health entrepreneurs are technology, data science, and health care delivery experts, but may be less experienced in managing a growing startup. An investment firm specializing in digital health will help the startups in their portfolio find the right banking and other relationships to build their business knowledge while they are developing their industry-transforming solution.
JPMorgan Chase, which acquired First Republic during the crisis, is a world-class institution and more than capable of taking the reins going forward, and SVB has begun returning operations to as close to normal as possible under First Citizens ownership. A critical piece of the success of these organizations will be the retention of the SVB and First Republic professionals, who helped drive and accelerate investment growth in promising startups through their deep relationships and local market knowledge.
Despite the anticipated layoffs at SVB announced in late May, our hope is that digital health entrepreneurs will continue to build relationships with such banks that are deeply engaged in their communities so startups can benefit from their connections, financial support, and guidance.
Sunny Kumar is a physician executive.