The fall of Silicon Valley Bank leaves a hole in the ecosystem for financing cleantech startups — just how big remains to be seen.
(Bloomberg) — As the buoyancy drained out of the tech sector last year, leading to almost 100,000 job cuts in the US, cleantech looked like a bright spot. Investors pumped some $59 billion into climate technology companies in 2022, more than the year before, across 1,182 deals tracked by researchers at BloombergNEF.
The collapse of Silicon Valley Bank, on which the dust is just settling after a white-knuckle weekend, is throwing a wrench into that outlook. It’s the first major headwind to blow against a boom in climate-tech investing that was capped off by incentives in the US Inflation Reduction Act last year. SVB was known as a climate bank — one that lent big to renewable energy companies, specialized in small solar projects and by its own accounting served more than 1,550 customers doing climate and sustainability work.
Clean-energy developers with smaller projects received a welcome reception from SVB that they didn’t get at Manhattan-based giants like Morgan Stanley and JPMorgan Chase & Co., said Pol Lezcano, BloombergNEF’s lead US solar analyst. “Silicon Valley Bank was more than happy to pick up the tab for portfolios that were less than 100 megawatts,” said Lezcano.
That is, until the bank went into receivership on Friday and set off a feverish few days in which startups wondered how they’d make payroll, VCs worked to shore up support and regulators moved in to contain the damage. On Sunday, US regulators said they would guarantee all SVB deposits. The bank sent out a notice to its depositors on Monday, informing them that domestic transactions could resume. International payment services remain suspended.
The guarantee from Washington made “a significant difference” for climate-tech startups, said Joshua May, cofounder of Boston-based New Paradigm Energy, a provider of renewable energy solutions. But it’s “probably a little early to declare that the affected tech startups are completely out of the woods yet,” May said.
Silicon Valley Bank developed an outsized importance in the world of Northern California startups because it was willing to work with young companies pursuing outlandish ideas. “Most banks, they’re banking against assets or cash flow,” said Tom Steyer, co-founder of the Galvanize Climate Solutions investment firm and a former Democratic presidential candidate. “When you think about a startup, which has a good chance of having neither, you understand why many banks shy away. They chose to understand and work with startups.”
Although working with unproven companies carries risks, Steyer noted that SVB collapsed for other reasons. “This wasn’t the part of the business that got them into trouble,” he said. “What failed is the way they ran their balance sheet.”
Several founders and investors told Bloomberg Green that climate companies are unlikely to escape the SVB fallout unscathed. Cleantech startups saw the bank as an ally that understood the fight against global warming, as well as the VC community and the entrepreneurial mindset. That stood in contrast to how they often saw big Wall Street banks: intimidating, hard to crack and less interested in their relatively small deposits and revenues.
“When we talk about climate innovation, we’re often talking about cutting-edge, highly experimental and at times risky developments,” said Amali de Alwis, chief executive of UK-based nonprofit climate accelerator Subak. Sometimes that means “hardware and deep tech” that “often require large amounts of investment over long periods of time.
“The question is, if it’s not SVB, who is it?” de Alwis asked.
Eric Archambeau, co-founder at Astanor Ventures, which has bankrolled a number of high-profile climate-tech startups, said the bank’s demise leaves “a big hole” in the ecosystem for climate tech financing. “There will also be more red tape for these young companies as they will have to turn to other, non-specialized action for banking options,” he said.
Some impacts are already emerging. Sunrun Inc., the biggest US residential-solar company, saw its shares fall to a four-month low on Friday over concerns about its exposure to SVB, before stabilizing on Monday.
Sunrun’s experience, however, also suggests that some banks may be willing to step into the hole left by SVB. “Even starting Friday, you had a lot of other financial institutions that were reaching out for your business, for our business,” said Chief Executive Officer Mary Powell in an interview Monday. “We feel like we’re in a good position.”In the short term, the bank’s collapse also “means probably less service and less accommodation for portfolio companies, and it means higher cost of capital for a credit line,” said Joe Osha, an analyst at Guggenheim. “And that is the big takeaway: This is another lever that’s going to put upward pressure on the cost of capital.”
But SVB’s failure differs significantly from the wave of bank failures during the 2008 crisis, said Katie Rae, CEO of The Engine, a Cambridge, Massachusetts-based venture capital company that uses SVB as its commercial bank. While the bank may have run short of funds, few of its loans to the clean-energy industry are at risk of default. “These are very good underlying assets,” Rae said. That may help make this a short-lived issue; Rae expects the financial system to work out the kinks from the SVB failure in a few months.
Longer term, the worry is that the crisis quashes innovation, said Jamie Vollbracht, founding partner at London-based climate tech fund Kiko Ventures. That would cause problems for capital-intensive, highly risky but potentially revolutionary green technology. “The nightmare scenario here is that Silicon Valley Bank’s demise has a knock-on impact on the availability of risk capital, and the appetite for risk from the banking and financial sector as a whole,” he said.
Even with the fallout from SVB’s collapse, many investors and companies say green tech is more resilient than it might appear. Subsidies in both the US and Europe, as well as the sector’s importance to reducing emissions, could help carry it through SVB’s collapse, as well as any wider economic fallout.
“The massive infusion of public money both because of the Inflation Reduction Act in the US, and the major agreement recently struck by the EU, is still giving VCs a fair amount of confidence moving forward. Even with all the worries of recession,” said May of New Paradigm Energy.
Sean O’Sullivan, a managing general partner at SOSV, a global venture capital firm that has bankrolled around 150 climate-tech startups, pointed to “a huge wave of support” for climate tech companies and “billions in freshly raised climate capital waiting to deploy. Everyone knows that climate investing must move forward, for all our sakes.”
And while SVB had become a key lender for clean energy, there are now more banks willing to play that role as renewables become more mainstream, noted Matt Petersen, chief executive officer of the Los Angeles Cleantech Incubator. He called SVB’s collapse “a speed-bump for the industry.”
Steph Speirs, CEO of Solstice Power Technologies Inc., a Cambridge, Massachusetts-based manager of community solar projects, said that the banking industry increasingly recognizes renewable energy as a good investment. “There’s a host of other financiers that are looking for an opportunity to invest in cleantech,” she said. “We’ll see other financiers step into the space.”
Forbright Bank, which finances everything from $40,000 residential solar projects to $100 million large-scale solar farms, is among lenders already seeing an increase in deposits over the past few days, according to founder John Delaney. The former congressman declined to say how much new money the Maryland bank has received.
“There is no one entity that dominates financing in this area,” he said. “I don’t see this situation slowing capital going towards decarbonizing the economy.”
For now, the clean-energy industry is waiting to see which entities do move in to take over the role SVB played in the market. “We haven’t seen another financial institution yet step up and say, ‘We will be the lender of choice for climate tech,'” said Sierra Peterson, founding partner at Voyager Ventures, a venture capital firm. “But I do think it’s a matter of time. This is a massive market opportunity.”
–With assistance from Brian Eckhouse, Will Wade and Saijel Kishan.
(Updates with comments from Tom Steyer in the sixth and seventh paragraphs and Sunrun CEO Mary Powell’s comments in the 13th paragraph. A previous version updated Sunrun’s stock performance.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.