What the Silicon Valley Bank Collapse Means for Climate Technology

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

After a very stressful weekend for many startup founders and investors, banking regulators hatched a plan to freeze SVB’s deposits to ensure depositors don’t lose their money.

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

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

“Many clean energy companies took money to SVB because they had an established and dedicated clean energy practice and were perceived to have more experience in the clean energy space than most regional and large bulge bracket peers,” said Dajani to CNBC.

But the climate space has grown since SVB started, and this paves the way for new lenders to serve the market.

“Basically, the companies that are coming out climate right now have real strength. These are fundamental companies and people want to lend to them because it’s good business,” explained Katie Rae, CEO of The Engine, an accelerator and venture fund with a focus on hard tech, including climate startups.

“Just in the last three days, I probably have 50 emails in my inbox from different providers saying, ‘Hey, I know SVB is not in good shape. We also do venture debt.’ So many are going to show up, Rae told CNBC in a phone call Tuesday.

Venture-backed startups are an unusual type of business. In their early stages, they may not have cash flow, revenue or even customers. Instead, they rely on venture funding, where investors offer cash in exchange for equity in hopes that startups will prove their technology, find customers and eventually grow into giants.

Providing banking services to these kinds of customers requires special skills and an appetite for risk.

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

“I imagine a startup’s application being simplistically destroyed by a big bank’s risk committee,” Bogue told CNBC.

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

“Silicon Valley Bank understood that even though we might only have $10,000 or so 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 JP Morgan Chase in December 2017.

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

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

“Some people might conflate their balance sheet-driven meltdown with the failure of this startup-focused business model — but actually, I think banking startups continue to be a great business and a role that somebody has to fill,” Clerico told CNBC. (Notably, Clerico is an angel investor in Mercury, a startup working to address this need.)

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

In the climate technology ecosystem, SVB was particularly prominent in providing loans to companies with venture capital financing, known as “venture debt”. This is important for startups that are still not generating enough cash flow to be self-sustaining, especially when they are between funding rounds.

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

“There are other places that ventured debt, but Silicon Valley Bank was the £1,000 gorilla in the room,” said Ami Kassar, managing director of corporate lending consultancy Multifunding.

“The concern now is that even in cases where deposits are made whole, the credit facilities for companies with SVB are likely to be no longer available and this is a sector where these are critical,” Dajani said.

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

“I’ve always wondered how they managed to get the regulators to allow them to have such a large concentration of venture debt,” Kassar said.

SVB was an early supporter of climate technology and helped many of these companies get started. But as the sector matures, participants believe other financiers will be more willing to lend to these companies.

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

For example, SVB provided financing for 60% of community solar projects, says Kiran Bhatraju, CEO of Arcadia, a climate technology company that, among many services, helps people connect to community solar projects.

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

“But renewable energy has come a long way in the last decade and there is now a much wider universe of potential financiers looking to get on board,” Speirs said.

Braun also expects to see that.

“I think we’re going to see a lot more institutions build dedicated climate practices and funds to support startups emerging in this space,” Braun told CNBC. “While SVB may have been a first mover, I do not believe that the events of last week will diminish the desire to fund and support the new companies that are driving the rapidly growing climate technology sector forward.”

First Republic and JP Morgan 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, a founder of venture capital firm Vestigo Ventures, agrees.

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

However, that transition will take time. And for companies working to combat global warming, time is the ultimate enemy.

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

“With all the new investments in climate technology and the opportunities ahead that the IRA (Inflation Reduction Act) provides, there is a ton of momentum. We don’t want to lose that,” Bhatranju said.