Silicon Valley Bank Gets Back to Lending, Albeit at Slower Pace

Silicon Valley Bank, which was recently acquired by First Citizens BancShares, has resumed lending to the startup and venture market, though less aggressively than in the past. 

SVB’s slowdown in lending is contributing to a sharply decelerating venture-debt market, which means there are fewer sources of financing at the very time more startups are struggling.

“The economy and the fundraising environment are headwinds on loan origination,” said Marc Cadieux, a 30-year-veteran of SVB who was named president of its commercial banking division in June. “Fewer companies are able to clear that key underwriting bar—do you still have the support of venture investors behind you,” he said. 

The SVB loan book is expected to decline by about 8% by year-end, assuming the venture market remains depressed, said Craig Lockwood Nix, chief financial officer of First Citizens, during its first-quarter earnings call in May. First Citizens acquired SVB in March after the bank failed and was taken over by federal regulators. 

As of March 31, SVB had a loan book of $66 billion, with about a quarter of that issued to technology and healthcare companies and 55% to venture and private-equity funds. By April 30, it had declined 9% to $62 billion, according to First Citizens’ first-quarter earnings presentation. 

Nix said most of the contraction would likely come in the borrowing by venture and private-equity funds, while loans to tech and healthcare companies would remain steady. That contrasts with several years of loan expansion at the legacy SVB business.

SVB continues to originate loans in all of its lending segments, Cadieux said. “The priority is to be there for our clients in whatever way they need us,” he said. SVB is aware of how critical venture debt is to the startup and venture community, and the bank continues to extend credit in cases where a company is close to being able to turn a profit, he said.

Yet changes in the market are forcing SVB and other lenders to be more cautious. Banks, in general, tightened credit standards amid weaker economic prospects in the first quarter, according to a survey by the Federal Reserve.

Lenders typically expect unprofitable startups to demonstrate that they are likely to raise additional venture funding. That is harder to do now when venture investors have grown more risk-averse and equity funding volumes have rapidly declined. 

U.S. startups raised $12.7 billion in venture debt via 952 deals through mid-June, compared with a full-year total of $64.6 billion through 3,012 deals last year, per research firm PitchBook Data.

Venture debt also shrank as a share of total venture funding. Venture debt represented just 16% of all venture funding through mid-June, according to a WSJ Pro analysis of PitchBook numbers. In all the full years 2012 to 2022, venture debt accounted for between 22% and 34% of overall venture funding, per the data.

A venture-debt contraction could have longer-term ramifications for the startup market, said Olav Sorenson,

In addition to a slower pace of lending to startups, SVB also expects a decrease in its lending to venture and private-equity funds, Cadieux said, which correlates directly with the venture market.

That typically takes the form of so-called capital-call lines, where funds borrow from SVB to make investments into companies and then pay back the loans after making capital calls on their own investors, called limited partners. 

“If they are investing less, they are using those lines less,” Cadieux said. 

Besides general market conditions, SVB is also facing a situation where its parent company’s executives have said they plan to decrease the overall bank’s loan-to-deposits ratio. 

After acquiring SVB, the loan-to-deposits ratio at First Citizens increased. At the current level, First Citizens “is viewed as pretty loaned up,” said Kevin P. Fitzsimmons, senior research analyst at research and investment banking firm D.A. Davidson.

Write to Yuliya Chernova at [email protected]