Inside the new, post-crisis market for startups’ deposits | American Banker

Inside the new, post-crisis market for startups' deposits | American Banker

Cash held by U.S. startup businesses — much of it previously held as deposits at Silicon Valley Bank — scattered widely after the bank’s collapse in March.

In search of safety, startup founders moved billions of dollars. Often the money went to megabanks, though some of it went to smaller banks and still more ended up at fintechs that serve the startup niche. Some of the cash went into checking and savings accounts. Some of it went into money market funds.

Exactly which banks got what is still somewhat murky. Few banks have provided details about precisely how many startup deposits they raked in, and some deposits that landed at a particular bank last spring or summer may have since been moved elsewhere.

But a recent analysis by Kruze, an accounting consulting firm with more than 800 startup clients, provides some insight into how the landscape has shifted since deposits started to pour out of SVB.

JPMorgan Chase, the nation’s largest bank by assets, appears to be the biggest beneficiary. A review of banking data from more than 400 of Kruze’s clients showed that 52% of them had a funded account at JPMorgan as of June 30, up from 12% as of Dec. 31, 2022.

JPMorgan’s share of the startup deposits that Kruze analyzed also rose sharply. The New York bank’s share rose from 11% in late December to 30% in late June, according to the report.

The other U.S. megabanks — Bank of America, Citigroup and Wells Fargo — also saw an increase in total startup deposits, startup-funded accounts and overall startup deposit market share. But those influxes weren’t as drastic as at JPMorgan, the report showed.

“JPMorgan is a clear winner,” said Healy Jones, vice president of financial strategy at Kruze. “It took a pretty impressive share … and it is perceived as a safe place with people.”

In the spring, JPMorgan created a team that is specifically focused on serving early-stage startups. It hired Ashref Hebela, the former head of startup banking at Silicon Valley Bank, to lead the group. The megabank, which began building its innovation economy business in 2016, now has more than 400 bankers within its commercial bank who are focused on serving the technology sector.

JPMorgan, which is nearing $4 trillion of assets, got an added boost in the startup banking business in May, when it acquired substantially all of First Republic Bank. San Francisco-based First Republic was one of several banks that served the tech industry.

“Our objective is to become the primary bank to any of these companies, whether it be a startup or Series A or B or C,” said Melissa Smith, who is co-head of JPMorgan’s innovation economy segment and head of specialized industries for the company’s commercial banking business. 

“That means we’re not just out there trying to collect deposits. We want to be there to support everything that company needs to do … to continue to grow,” she added. That includes everything from a basic treasury management platform to preparing a company to go public.

JPMorgan did not say how many deposits from startups it has added since March, but Smith noted that there was a “significant inflow of clients,” especially in the early days of the upheaval.

Bank of America and Wells Fargo both said they are taking a selective approach when it comes to bringing on startups and collecting their deposits.

Soon after Silicon Valley Bank failed, Bank of America formalized a venture capital strategy team to capture more business from emerging growth companies, which it defines as late seed, Series A and Series B companies.

The Charlotte, North Carolina-based bank focused on companies that already had a relationship with it, such as in global wealth, global markets or private equity. It was, in part, a way to handle the huge volume of potential client inquiries that were streaming into the bank in the early days.

Since March, Bank of America has brought on “hundreds” of new companies in the emerging growth space, said Cathy Callahan, Northeast region head for business banking at BofA.

“The emerging growth segment … is absolutely something we’re interested in,” Callahan said.

Meanwhile, San Francisco-based Wells Fargo honed in on serving software- and fintech-focused startups. The bank “much more intentionally” went after early-stage companies, many of which it had already identified as prospective clients, according to Tom Harper, its head of technology banking. 

Like other big banks, Wells saw a “significant volume” of inquiries from potential clients, but it turned down some that didn’t seem to fit into the bank’s strengths, Harper said.

“It’s about well-rounded relationships where we’re providing other capabilities,” he said. “We’re certainly still interested in gaining market share, but it’s about doing it with the right relationships.”

The largest U.S. banks aren’t the only ones interested in capturing startup deposits. HSBC, which acquired Silicon Valley Bank’s U.K. division, launched “HSBC Innovation Banking,” which also includes new innovation teams in the United States, Israel and Hong Kong, according to a press release. In the U.S., HSBC has a team of more than 40 bankers in San Francisco, New York and Boston who are serving startups and other innovation companies.

First Citizens BancShares, which acquired big chunks of Silicon Valley Bank, is trying to lure former clients back and rebuild a venture-debt practice with the SVB brand.

“First Citizens recognizes SVB’s critical role in the innovation economy and intends to maintain and build on our model,” Marc Cadieux, president of First Citizens’ Silicon Valley Bank, said in an email. “What our clients in every sector and life stage need and expect … is still here.”

April 4, 2023 12:02 PM

In June, Customers Bancorp of West Reading, Pennsylvania, expanded its technology and life sciences business with the acquisition of $631 million of venture banking loans from Signature Bank, a New York City-based company that also failed in March. Around the same time, the $21 billion-asset Customers hired 30 members of Signature’s venture banking team to further grow its venture banking division.

The hires included Ken Fugate, who joined Signature in 2019 to run its new venture banking group. Fugate also founded Square 1 Financial, which was acquired by PacWest Bancorp in 2015.

The acquisition of the Signature loan portfolio meant that Customers also picked up the deposits tied to those loans, Fugate said in an interview. During the third quarter, core deposits at Customers rose by $1 billion, with a little over half of that growth coming from the venture banking group, the company said.

“This is an expansion” of what Customers was already doing, and it’s an “opportunity to take the Customers brand national,” Fugate said. He added that Customers has accelerated its growth into the startup market by five years.

In the Kruze report, HSBC, First Citizens and Customers were all included among a group of more than 50 “other” banks and nonbanks that saw their combined market share of deposits increase among the firm’s client sample.

The “other” group went from holding 6% of deposits for the client set as of Dec. 31 to 19% at June 30, according to the Kruze analysis. Combined, they held about $247 million of startup deposits at the end of last year, but that total ballooned to $695 million at the end of June, the report found.

Bankers interviewed for this article said that the risk of adding startup deposits is mitigated by their institutions’ diversification. In other words, their banks don’t plan to become such niche players in the startup ecosystem, as Silicon Valley Bank was, that they risk failure due to a bank run by those startup clients.

Customers, for instance, “wants to be diversified,” said analyst Frank Schiraldi of Piper Sandler.

“They don’t want all of their eggs in one basket,” he said. “I think what they’re going to do is keep limits on these deposit verticals in the same way that banks have kept limits on loan categories.”

This content was originally published here.