So tech has their deposits back (phew!), and now needs a new bank.
What should the “New SVB” look like? Some thoughts:
Hopefully the New SVB has zero change in the awesome people the “og svb” bank employed that work on the client-facing front lines with founders and VCs. They are amazing.
Under the hood below the client-facing team though, New SVB will operate very differently:
New SVB needs to think differently about deposits as two separate buckets:
- Cash from startups that aren’t profitable. Don’t loan against these new deposits as it will be gone in 18 months. Startups don’t need high interest rates on these deposits, they just want to be sure the cash is there when they need it for payroll.
- Cash from profitable companies. This is safe to loan against.
For unprofitable companies, each inflow of cash deposits from new funding rounds will last on average 18 months before another round is needed. So don’t loan against this money, and certainly don’t lock it up in 3/6/8 year bonds/securities.
For profitable companies, you can count on that money being in the bank long term, so safe to loan against those balances with traditional loan/deposit ratios.
New Svb needs to allocate debt differently
- The “OG SVB” would wait until a startup does an equity financing and then give 50 cents of debt on top of every equity dollar raised. If a company just got an equity financing, they don’t need debt on top of that equity. And all too often founders treat cash from debt just like cash from equity. So they add up the equity $ and the debt $ into “cash” and divide by 18-24 to figure out what is a reasonable monthly cash burn. But as they get to the end of that cash runway, it is very different if the cash remaining came from debt vs equity. Your real cash runway was actually much shorter as the debt cash has to be paid back. And by the time you cut back your burn to proper levels when cash gets tight, the interest and principal payments on the debt cash cause your post-RIF burn to be much higher, hamstringing the company’s ability to have a critical mass of employees. The debt more often hurts vs helps.
- New SVB will give out debt algorithmically only for “cac debt”. i.e. it can only to be used for scaling up cac spend on companies with working unit economics. I presented this idea to the ogsvb leadership a few years back but they didn’t go for it unfortunately. How it works: the basis of all startups is they build a product that delivers value to customers, and customers pay about 10% of that value to the startup. Key then is does the customer pay you far more than it costs in customer acquisition cost to get the customer. 99% of startups succeed or fail on this one question. So the New Svb will plug in to the saas/cloud data stores of the startup and if each $1 from the balance sheet spent of sales and marketing quickly turns into $2 of gross margin, debt is available to that startup. It is very low risk debt as you decide monthly whether to keep giving it, only giving debt access while the working unit economics are holding firm. The yield is great as you can loan $1 and get paid $1.2 of the first $2 of gross margin generated by that $1 of cac spend. (the startup then is effectively putting up $0 for cac and getting 80 cents in gross margin. awesome). Since that cac doubling happens in short order for companies with good unit economics who can access the debt, the debt provider gets 20%+ interest rate at low risk. And since this debt financing eliminates equity round raises that in the past were largely used to fund cac spend, or at least allows them to do much smaller equity rounds, the New Svb can get huge warrants. The New SVB debt eliminates 20% dilution rounds or allows them to be 80% smaller, so the startup will happily give you 1-5% of the startup in warrants for cac debt access.
This type of debt allocation by tech’s new lead bank will help the entire startup ecosystem:
- It will smooth the peaks and troughs of vc equity funding, rather than amplifying the peaks like the old method of debt allocation.
- It helps focus founders and VCs on the key CACD (cac doubling time) metric, allocating debt capital to the companies with great unit economics, vs to those founders who can rally the most hype in getting equity financings.
- It helps female and minority founders who tend to struggle to get the overhyped equity rounds, so tend to have more much focus on getting their unit economics to work well. Attract just $1m of equity financing and get your unit economics singing and you can access most of your growth capital as CAC Debt from the New SVB.
The biggest complaint of founders of the og svb was their aging and unreliable tech stack.
The New Svb will be as aggressive users of data and modern stack software as the startups they bank. They will need to be great here at their core as their debt allocations are now algorithmic. They will be loaded with A+ software engineers and data scientists who make engaging the bank seamless. Awesome if it autosweeps dollars into accounts with no more than $250k so all is fdic insured. Awesome if they build out a bunch of benchmarking tools too off the data they have to further help founders make great decisions.
So does this New SVB already exist with the Mercury’s and the Brex’s? Or is this a bank that should get started from scratch? If you are the perfect Founder/CEO for the New SVB, reach out to Jeremy Burton at Platform Studio. Platform is great at co-founding startups with awesome Founder/CEOs.