Artificial Intelligence has been touted as the savior of San Francisco’s shrinking tech scene as mass layoffs, market uncertainty and a rising cost of living wreaks havoc on a city heavily reliant on tech cash. Industry excitement once lured back even the most reluctant San Francisco haters, and the Bay Area far outpaces other metro regions with its $6.8 billion in generative-tech venture capital investments.
But in the wake of Silicon Valley Bank’s spectacular weekend collapse, generative-tech startups worry that the scene’s investor bubble is set to burst. An entire system of early-stage tech financing blossomed from SVB since its 1983 founding, and it once enjoyed the position as the preferred bank of startups and techies alike.
Now, as the dust begins to settle, many investors and founders are left wondering if the fallout from SVB’s collapse will crash the generative AI hype train—or if it’s just another bump in the road.
SVB’s downfall began publicly on Thursday, as customers drew out some $42 billion in cash liquidity from the bank. By Friday, the bank had collapsed and federal regulators took over. Over the weekend, the Federal Deposit Insurance Corporation scrambled to auction off the bank and lay out a plan to connect desperate SVB customers to their deposits.
The worst of the bank’s crash seems to have been averted by the federal government’s swift action: The FDIC noted all clients will get their funds back starting Monday morning, preventing a payroll crisis and providing the cash many companies needed to meet payroll and run day-to-day operations.
But tech workers and founders are now navigating a shaken industry, one that is increasingly risk-adverse after months of turmoil, followed by a near systemwide banking collapse—and many are terrified.
“There's definitely a very nervous sentiment right now among founders who are looking to fundraise,” said Stephen Campbell, an AI company founder and head of The GAI Collective. “A bearish take on it is that funded founders are going to start getting older, they will have Ph.D.s and are going to get funded because VCs want to have a smaller risk profile.”
Campbell and venture capitalists are nervous that SVB’s collapse will calm some of the more freehanded AI investors, cutting out riskier firms and moonshot startups from future funding rounds. And given the newness of generative AI and the companies currently percolating around it, they might just be some of the first to lose big after SVB’s fall.
“It’s going to make the fundraising environment even more difficult for [founders] because there is no reward for people to say 'yes' right now,” said James Currier, general partner at venture capital firm NFX. “The negativity in the VC boardrooms is just really high. Everyone is deciding on the side of caution. Nobody's taking unusual bets right now, and it's just going to make the fundraising harder.”
The SVB collapse was also a wake-up call for many founders to diversify their banking portfolios, investing more time and effort into spreading their assets across numerous banks and fintech institutions. SVB operated in a special capacity as the tech world’s de facto cash cow, and in its absence, many former SVB clients in the startup scene are, anecdotally, turning to more established banks like Chase or JP Morgan.
“I created my company and had a bank account with Mercury, which is like a startup,” said Younes Bensouda Mourri, founder of LiveTech.AI and lecturer at Stanford University. “But I'm going to move because I don't want anything to happen to me with the banks. I don’t want to deal with startups anymore.”
SVB was not the only bank for startup clients, as smaller fintech challengers like Brex, Mercury and Arc cropped up over the last few years to provide financial services for the same type of venture-backed startup clients. And as SVB captured the startup world, more traditional institutions like JP Morgan and First Republic branched out to include startup banking services to snag a share of the market.
But investors and founders are mourning more than the financial services SVB offered to clients; the company gained its stature stemmed by forging close personal relationships with clients.
“When I was working on my company in school, when I got my first check, [my partners] linked me up with SBV,” said Amber Yang, an investor at Bloomberg Beta. “I was super young, confused and didn’t know what to do. But the fact that there was someone personal from SVB—I’d seen them around at events—I was like, ‘Oh, I can trust them.’ It was very easy for someone who was so young and had no idea what to do.”
SVB estimated last year that it serviced nearly half of U.S. venture-backed tech and life science companies, as well as 44% of tech and healthcare IPOs. At the end of 2022, the bank had total deposits up to $173 billion, with up to 88% of all SVB deposits exceeding the FDIC’s $250,000 insurance limit. And Pitchbook estimates say SVB lent $6.7 billion to startups in 2022.
It all boils down to something fintech folks call “venture debt”: loans given to early-stage, high-growth companies, often used to fund startups and businesses between equity funding rounds.
SVB was a major power player when it came to these loans: Before its implosion, the bank had a roughly $73 billion loan book, a fifth of which was venture debt according to PitchBook figures. Silicon Valley Bank was the first to dole out venture loans the helped it establish a major foothold in the tech and innovation sector, making it a specialty for the banking firm.
“Especially during the good years of 2021, [relying on venture debt] was a very real scenario—it's basically free money, right?” said Sofiia Shvets, founder of Claid AI. “You get a loan, you can extend your runway and the interest rate is very low. It changed in the last year, though, and it was not that common in 2023 because of the recession, and the interest rates got higher.”
So will SVB’s downfall drag AI with it?
Perhaps not. Though, founders worry that the fundraising landscape will tighten in the coming months—as it likely will for other tech sectors like crypto.
“My honest opinion is that this will be a really positive thing for AI,” Currier said. “The hype around AI has been drawing in some fantasy thinking about what being a founder will be like.”
Ultimately, continued optimism in AI seems to stem from investors' belief in artificial intelligence and generative tech. Even as economic turmoil emptied Downtown San Francisco’s offices, AI techies still flooded to the Bay. And as SVB sweeps up the rubble from its implosion, OpenAI is set to release GPT-4 this week.
“Everyone's still really excited about the AI space,” Campbell said. “I was at a meet-up this weekend, so the enthusiasm hasn’t died down, but the constrained optimism around funding is the sore spot.”
Liz Lindqwister can be reached at email@example.com