Beware of friendly fire!

What a week it has been for both bankers and startups! Ok, it sounds like Silicon Valley Bank (SVB) had not adapted to the changing interest rate reality, but a few prominent VCs yelling FIRE from the rooftop certainly sealed the fate of this institution and made life for startups even more difficult.

I don't want to dwell on the causes of SVB's failure as several good analyses have already been published. On the other hand, I do take issue with a few high-profile VCs effectively taking down an institution that underpins the startup world and one they generally steered their portfolio companies to use. Saving a few of your children while dooming the next generation does not make good sense to me. SVB was one of the only banks that offered more than just transactional banking for loss-making startups, hence their popularity with the community.

So, the big question is in my mind: how is the vacuum left in the startup ecosystem going to be filled, and how do we move forward from here?

It depends on where you are both in your location and journey. In the US, especially for later stage startups who really need more than transactional banking, it will take time for an institution to directly replace SVB, at least with the same understanding and willingness to work with startups. But there is a collective need for it to happen and, hopefully, we will see some new shoots soon.

Looking at our market, mainly UK early-stage startups, banking is far more transactional.

• Major UK banks don't really understand or have any desire to work with startups. Most have eliminated their relationship managers, so for smaller companies, there is really no relationship to build. Yes, a UK company can get a basic account – but that's about it – and be prepared for reams of Know Your Customer (KYC) questions when you take in a financing round. Hopefully, the HSBC acquisition of SVB UK will be a good thing for the UK ecosystem, but only if they keep some of the startup DNA from the company they bought for the princely sum of £1.00. 

• Fintech/ neobanks offer easy and fast KYC, good digital tools, low or even no fees. But these institutions are built to be light touch and solely transactional. You're not going to build a relationship here either. Maybe one will emerge with some products for the startup world, but this will be a slow burn.

These days, early-stage UK startups need to view banking as transactional. No UK bank is going to give a loss-making startup a loan or offer any real meaningful financial products. Look for a well-capitalised and insured bank that offers low-friction KYC and services. Also, adopt good basic operational risk management by having accounts in at least two banks, just in case. There are many candidates, and this bump in the banking road should not slow down good quality early-stage startups in the UK, with the following caveats:

1. Funding lead times will increase as all investors are being far more cautious with their investments. 

2. Valuations will be compressed, starting with late-round raises and then working down the value chain.

So, the world is not coming to an end. New companies will be created, deals will be done, and money will be made. We may have lost a convenient tool for now, but the vacuum will be filled.