Wednesday, May 31, 2023 | 04:37 pm

Pittsburgh’s Tech Companies Are Recovering From the Collapse of Silicon Valley’s Banks

Pittsburgh’s Tech Companies Are Recovering From the Collapse of Silicon Valley’s Banks

It’s easy to assume that tech entrepreneurs are all similar, but the March 10 meltdown of Silicon Valley Bank (SVB) – and ensuing concerns about bank runs – disproves that notion.

For Joe Hipsky, co-founder and chief strategy officer of IRALOGIX, the news of SVB’s difficulties was disturbing – especially since his company, a high-growth Pittsburgh-based retirement savings startup, relied on the California-based bank.

The IRALOGIX leadership team knew they had to take action fast because the bank’s failure could jeopardize payroll for its more than 90 employees.

Hipsky and his colleagues relied on their experience in the financial industry – his from previous stints at Merrill Lynch and Credit Suisse. By that Sunday night, just two days after trading in SVB shares was halted, Hipsky says “we made payroll.”

The IRALOGIX story shows how Pittsburgh entrepreneurs are connected (in good and bad ways) to the larger tech ecosystem.

Empowering startups to get into business

Foo Conner, CEO of Jekko, a Pittsburgh-based high-tech broadcast media studio, didn’t intentionally create his company’s relationship with SVB. It was part of the package he received when he signed up for the Atlas program, an initiative by payment processing company Stripe to provide a suite of financial services to startups.

Stripe built the Atlas program to meet the needs of new companies, including forming a corporation, obtaining employer identification and tax IDs, integrating with QuickBooks, and opening a bank account in a “startup friendly” bank, such as Silicon Valley Bank.

According to Stripe, five years after the 2016 start of the Atlas program, 20,000 startups had joined and had generated more than $3 billion in revenue.

While there are no published stats about how many of those startups are in Pittsburgh, there are probably others like Conner, each of whom received an email from Stripe on Friday, March 10, alerting them that the FDIC had taken over Silicon Valley Bank, and providing them with instructions on how to open an account with a different bank.

The reconnection to a different bank was important because Stripe collects money from customers on behalf of the startup (for a percentage fee), and then – after verification from the customer’s credit card issuer that the money has been transferred to Stripe – moves it into the bank account of the startup.

On that same day – March 10 – Square, the competitor to Stripe that was founded by Twitter founder, Jack Dorsey, also sent a letter to their customers alerting them to the SVB news. Square had disconnected their accounts from SVB, and assured customers that it was holding their money until the startup reconnected to a new bank.

Since Jekko had both Stripe Atlas and Square accounts, Conner received both of these letters. He never intended to use SVB as his primary banking relationship, but recognized that it still would have an impact on how he collects money – and that there could be broader implications.

Impact on the Pittsburgh ecosystem

Terri Glueck, vice president of communications and community development for Innovation Works, says there are probably around two dozen venture-based companies in the Pittsburgh community that might have been impacted by the failure of SVB, including a few in Innovation Works’ investment portfolio.

She notes that Silicon Valley Bank has had an office in the Philadelphia area that had in the past sponsored events with Innovation Works, but that they had not been active in the Pittsburgh area recently.

“We try to wring out as much risk as possible for our companies, but you can’t wring out 100%, and that’s the downside of startups. There are lots of risks, some of which you don’t know about,” says Glueck.

Wendy Jarchow, chief investment officer of River SaaS Capital Fund and co-chair of Three Rivers Venture Fair, says regulators did the right thing by stepping in promptly.

“Using the depository insurance fund is the right thing because it quelled some of the panic,” she says.

Only two of her portfolio companies were affected, neither in Pittsburgh.

Sree Gadde, managing partner of BlueTree Venture Capital, says that one of BlueTree’s companies was impacted, but mostly related to long-term implications. None of the capital in its SVB account was needed immediately. The company was concerned with how it would get the money out that it planned to use for growth. Due to the regulators taking action, the company was able to access its cash quickly.

A new paradigm

“We’re now in a bit of a mindset change. We’ve told our companies to put their money in two separate banks, one national brand and one local,” Gadde says.

“You want a local bank because they can do debt financing better for local companies; so you’re more likely to have access to debt from a local bank. But they provide their services to depositors; so you want to be a depositor. The majority of [startup’s] money should be stored in a larger bank. They’re not as likely to face a run. They’re also more likely to have their deposits better managed.”

In Pittsburgh, where several banks such as PNC and BNY Mellon could satisfy both categories of banks as detailed by Gadde, he suggests considering them as the big bank option.

Hipsky’s actions for IRALOGIX are in line with those recommended by Gadde.

“Our main bank is now JPMorgan,” says Hipsky, adding with a smile, “If they go under, the world’s over.”

For startups looking for new capital, the recent run on banks that started with the SVB troubles may cause a different concern – access to investments.

It’s likely that in the short term, venture funds are going to reserve a larger portion of their uninvested funds for their current portfolio companies, thus making fewer dollars available for investing in additional companies. That would exacerbate an investment market that was already seen as more difficult since 2022.

Looking at history, though, investors have short memories, and will likely loosen the reins again as soon as the next opportunity bubble appears.