Is Silicon Valley Bank Facing Future Trouble?

Silicon Valley Bank is — for lack of a better way to put it — a very special place for very special people. The Santa Clara-based bank is the financial services home of both the rich and powerful of tech culture and the anointed up-and-comers expected to shortly join their ranks.

What’s so special?

Invitation-only mortgages for founders and VCs; special deals for VCs looking to fund investments. The bank’s parent, SVB Financial Group, owns warrants in 1,625 companies, which means it has the right to buy shares in those businesses.

“It’s a whole ecosystem we are building,” said Gregory Becker, president and chief executive of Silicon Valley Bank and SVB.

The tech boom has been good to SVB: Profits are up to $263.9 million year over year; total assets increased 40 percent in the last 18 months into the $42 billion range during Q3. The cooling of the tech inferno has had an achoring effect on SVB, which as of October is predicting a slower 2016. The bank has also tripled the volume of loans it does not believe will be repaid in full — an alarming-sounding stat, though one worth coupling with the knowledge that it is still a small number of loans.

But watchers and even fans are becoming concerned about SVB’s exposure to the fortunes of the tech market. More than half of all U.S. venture capital funds and venture capital-backed companies are clients.

“SVB is a long-term player,” says Byron Deeter, a partner at venture capital firm Bessemer Venture Partners, which leads startups to the bank. However, “if the music stops, it can stop really fast.”

And though the music is playing, it is clearly dropping the tempo in tech. SVB share price has declined 15 percent since the halfway mark of 2015, and the bank is expected to write off about 0.3 percent of its loans this year, as opposed to the more traditional 0.15 percent usually seen in banks of a similar size. An SVB spokeswoman told The Wall Street Journal its write-offs are “in line” with those of large banks.

But Silicon Valley Bank, however “in line” with banks of similar size, is quite a different animal. While all banks are looking to form relationship with customers — human or business — SVB, with its extremely close ties, particularly in the VC and investor community, is unusual. The bank, for example, is known for being more merciful when startups need a break on loans (based largely on the positive word of VCs).

Some note this is a bad idea and that too much mercy is only delaying the inevitable for some firms and polluting the view of the marketplace for others. That opinion is notably held by those who do not make their careers in Silicon Valley.

“Guess what? Ninety percent of companies are off-plan at some point in their history,” replied Becker. “Maybe they violate a loan covenant, and then that’s when we have the dialogue with the venture capitalists.”

“SVB is the kindest bank in the business,” said Martin Pichinson, who has worked with the bank through Sherwood Partners Inc., the Mountain View restructuring firm where he is co-president. “They will work with clients because of their relationship with VCs.”

And kindness has paid off: SVB made $71 million on warrants from Twitter and FireEye Inc. Both companies borrowed from the bank before going public, granting warrants to SVB as part of their loan agreements. The number of companies in which the bank now holds warrants is up 33 percent since 2009.

Kindness has also helped SVB fend off much larger rivals, like JPMorgan and Morgan Stanley, both of which have been pursuing commercial banking business from startups and venture capital firms.

But kindness is much easier to offer when the market is booming and cash is flowing. The next interesting question for SVB is if it can keep its kindness going and hold off those bigger rivals if the market cools down.