When Silicon Valley Bank (SVB) suddenly collapsed in the second-largest bank failure in U.S. history, many startups and their VC backers focused on sustainability and tackling climate change sprang into action to secure their funds.
Federal financial regulators soon stepped in to guarantee deposits, but tighter lending conditions from the banking crisis and higher interest rates pose new challenges for climate tech companies at a time when there's not much time to act and avert the worst effects of climate change.
“There is a massive hole in that slice of the climate capitalization pie that's missing," Sophie Purdom, managing partner at Planeteer Capital, told Yahoo Finance at the recent Techonomy conference. “SVB did play this really essential role in the ecosystem because they were willing to take on technologically perceived riskier types of clients than maybe the bigger four or so banks were willing to mess around with. These tend to be smaller companies, smaller accounts, [with] higher risk premiums."
SVB made over $1 billion in loans for U.S. renewable-energy projects in 2022 and pledged to increase financing for sustainability efforts to $5 billion by 2027. The regional bank also claimed to have been involved in 62% of community solar projects, which help renters and lower-income communities access renewable energy.
"With Silicon Valley Bank, we've seen definitely some air get sucked out of the system," Nneka Kibuule, principal at Aligned Climate Capital, told Yahoo Finance. "A lot of firms looked to Silicon Valley Bank for venture debt, but that doesn't mean that there aren't other providers. I think anytime there's like such a big change like that there's a time of readjustment."
'Goodwill only goes so far'
Purdom explained that SVB had built up a lot of "goodwill" in Silicon Valley and the climate tech ecosystem. The bank sponsored Bay Area parties, conferences, global events, and even a women's cycling team in addition to investing in climate funds. It also developed a reputation for its relationships and expertise in climate tech, having been invested in green technology for nearly two decades.
But when a bank falters, "that goodwill only goes so far," Purdom said. “So it was a reality shock to the system for a lot of us. And maybe in Silicon Valley it was thought of as SVB is too ingrained to fail — maybe not too big to fail, but kind of too ingrained.”
Silicon Valley Bank has stated that it is "conducting business as usual" since the FDIC took over operations and sold much of the bank to First Citizens (FCNCA), and SVB's $75 billion loan portfolio has reportedly attracted interest from potential buyers in private equity, including Blackstone, Apollo Global Management, the Carlyle Group, and KKR.
But the collapse has rattled investors and left companies and their VC backers uncertain about whether they will be able to access specialty banking services — from SVB or other lenders — that cater to early-stage companies not yet turning profits.
And climate tech companies still have options to raise capital through equity and debt, though overall it will likely become harder for companies to get funding.
"What this bank collapse is going to do, hopefully, is increase the due diligence process of the investors into these VC-backed startups, which is going to continue to slow that funding," Kyle Stanford, senior analyst of VC at PitchBook, told Yahoo Finance Live (video above). "It's going to make it more difficult for these companies to raise capital even ... than it's already been."
The gap left by SVB may also "bifurcate the market," where seed and early-stage companies may have difficulties, he added. "Strong companies with strong balance sheets [and] lots of capital runway are going to be able to raise from equity investors or lenders, depending on how they want to go, and continue to grow in this market."
'A long, difficult process' for the climate tech VC market
For those in the sector, the upheaval in banking comes at an inopportune time as VC deal-making experiences a downshift.
In 2022, VC activity in climate tech dipped 3% from its peak in 2021, according to Climate Tech VC. That trend accelerated in the first quarter of 2023, according to Pitchbook data, with deals hitting a two-year low.
However, while climate tech funding has tapered off, it is holding up relatively better when compared to the decline in broader VC funding, which fell 53% globally year over year.
There are other reasons to be optimistic. Incentives in President Biden's climate bill, the Inflation Reduction Act, are expected to accelerate the green transition, and the growing awareness of the climate crisis means there is an appetite to develop new solutions and scale existing ones.
Nevertheless, it's evident SVB's failure will cast a long shadow on the market in the near term.
"This was a bank for not only startups but VCs, for executives at many of these companies," Stanford said. "This is a really intertwined bank with the venture market. And that's going to make it a very long, difficult process for the market to kind of unwind itself from the bank."
When asked if climate tech VC would survive further tightening of financial conditions, Kibuule said: "Survive? Yes. Thrive? Maybe."
Disclosure: Apollo Global Management is Yahoo Finance's parent company.