The initial panic over the Silicon Valley Bank collapse is over, but the VC-backed beauty startup landscape is now grappling with the potential long-term effects.
Reconsideration of which banks to use to keep their businesses’ cash safe is just the beginning of founders’ concerns, as the closure of the bank could have a broader impact on the VC landscape overall, say experts. Startup beauty brands including outdoor brand Kinfield, skin-care brand Herbivore Botanicals and period health company The Flex Co. were among those banking with Silicon Valley Bank before the collapse. But the event has caused many other startup brands to rethink how and where they store their cash.
One of the most immediate effects of the crisis is expected to be a flight to larger and older banks, in hopes of finding more stability for funds. Beyond Silicon Valley bank, founders and VC funds began shifting money out of other startup-oriented Bay Area banks like First Republic over the past week. That’s caused fears of another collapse, prompting a group of 11 large banks including Bank of America and Citigroup to collectively contribute $30 billion on March 16 to keep it afloat.
“There’s a flight to safety and flight to the bigger, more established banks,” said Jenna Jackson, a principal for growth at Cavu Consumer Partners. “A lot of people are saying they want to spread out to multiple [banks].”
“We’ve had a discussion around diversifying our accounts, so that we aren’t reliant on just one banking relationship,” said Calvin Quallis, founder and CEO of men’s grooming brand Scotch Porter, which secured $11 million in VC funding from strategic investment and advisory platform Pendulum a year ago.
“We certainly want to diversify into a bigger bank,” said Apothekary founder and CEO Shizu Okusa, who has a background in finance. For her plant-based wellness brand, she had opted for a regional Washington, DC bank, due to its low interest rates. What’s more, she said, “DC is going to be one of the most recession-proof areas, because it’s government contracts and information security and cybersecurity. It’s been the most stable.”
But just last week, she had been in talks with Silicon Valley Bank about opening an account, as the brand is in the process of fundraising for a new round.
As a go-to bank for entrepreneurs that was considered more startup-friendly than larger giants, Silicon Valley Bank’s closure is “such a loss,” said Okusa. “Typically, they are the ones that are the first movers to fund lines of credit” for startups. Without those lines of credit, that could mean a decline in VC funding, in general, as “equity partners aren’t going to invest as much if there’s not a lot of banking collateral.”
She added that the bank was a big facilitator in networking in Silicon Valley, often sponsoring conferences for entrepreneurs and investors to connect. But the strong network could have been part of the catalyst for the bank run, experts say, as tech CEO group chats and social media rapidly spread panic after the bank disclosed its losses and said it was restructuring its portfolio.
“The bank run was caused by the fact that SVB is this tech venture community. This would never happen in a random regional bank, because you wouldn’t have all these people connected on Twitter. They all know each other, and they’re on Twitter telling each other to take their money out,” said Tina Bou-Saba, co-founder and managing partner of Verity Venture Partners. “People are going to look back and be like, ‘Oh my God, this is the problem of having social media-driven echo chambers, because it caused a bank run.'”
“The real question is, ‘Would what happened to SVB have happened if there was no Twitter?’ The rate at which information, whether it be true or false, can travel around the world at the speed it does, is quite insane,” said Sugar Capital founder Brian Sugar, who moved the uninsured portion of the company’s money out of First Republic amid contagion fears.
“Some of my founder friends are nervous; others are working to keep our peers calm. I keep telling my friends that fear is what created this bank run to begin with, so we need to stick to the facts and not fuel panic,” said Lauren Schulte Wang, the founder and CEO of The Flex Co. Wang said the brand attempted to withdraw its funds on Thursday, March 9. She said that, in addition to The Flex Co., three of her investors had money at Silicon Valley Bank. “They initially advised against pulling our money out,” she said. But she was influenced to attempt to pull the money out by an interview with Gary Tan, the CEO of Y Combinator, which invests in the brand.
This could exacerbate an ongoing trend of VC money generally declining for beauty startups beginning in 2022.
“It doesn’t feel like there’s been a change in the past three days, like, ‘Oh, it was easy to raise money three days ago, and now it’s not.’ That turn had already started happening, if you look at the number of deals that were announced and done in Q4 2022. It was some of the lowest number of deals we had seen, and it felt like that carried over into Q1 2023,” said Jenna Jackson, a principal for growth at Cavu Consumer Partners. According to Beauty Matter, Q4 2022 beauty deals were down 28.8% from the year before.
“It felt like the uncertainty was already leading to some of these issues,” said Jackson. “This has brought it even more top of mind, and we don’t know the fallout yet. But it feels like what brands are asking is, ‘Does this only further the concerns that I was already having, as far as how difficult it was to raise money?’”
Personal care brand Athena Club, which just launched at Target, for example, secured $40 million in equity and debt financing instead of VC funding to support the expansion. “In the current market environment, everybody’s kind of moving that way,” toward debt funding, said the brand’s co-founder and co-CEO, Charles Desmarais.
“There’s probably going to be more debt deals than equity,” said Okusa, of beauty startups’ future fundraising. “Debt has a higher preference in the capital stack, meaning that if a company were to go bankrupt or something were to happen, they’d go through the Chapter 11 process, then debt holders would have a higher claim than equity holders.”
For startup brands, this will also mean a greater rush to profitability at a time when fears of a new recession are now higher than ever. That’s especially amid concerns of a banking crisis spreading globally, as Credit Suisse faltered this week before receiving a lifeline in the form of a loan.
The new environment also means higher scrutiny on potential brands by VC investors, who now have more time to do their due diligence without rushing to beat a competing firm to a deal.
“People were already watching their cash flows incredibly tightly because they were thinking about how difficult it might be to raise money, either debt or equity, in the near term. And they’re wondering if this will make a more difficult economy globally, which could affect their business. They’re also asking whether they need to think about preserving cash profitability, and about the ability to raise or not raise, even more so than they had in the beginning of this year,” said Jackson.