Why Wineries and Food Start-Ups Relied So Heavily on Silicon Valley Bank in the First Place

“When large institutions and gatekeepers make big changes, it’s often the smallest, most marginalized groups who feel the impact the heaviest."

For most Americans, the blink-and-you-miss-it collapse and subsequent bailout of Silicon Valley Bank (SVB) feel meaningless. The financial institution, which had assets and liabilities totaling over $200 billion before its weekend crash, mainly catered to venture capitalist firms, which can feel just about as far away from Main Street, USA as Earth does to the moon. But part of that almost unimaginable $200 billion was the funds owned by dozens of food and beverage startups. Many of them could be considered firmly in the "mom and pop" category, surviving week to week thanks to the only bank that would lend to them. Though it could feel removed from your daily life, save for missing a few of your favorite snacks and wines, SVB's failure could be the canary in the coal mine of U.S. banking.

This crash affects the little guys, too

“It’s a common misconception that what happened with SVB only poses a threat to big tech,”  Vanessa Pham, CEO and co-founder of Omsom, tells Food & Wine. Her 2020 start-up, which created all-in-one Asian sauce packets, experienced the downfall of SVB firsthand and sent an S.O.S. to its loyal fanbase on Instagram over the weekend, keeping them abreast of every change along the way. “When large institutions and gatekeepers make big changes, it’s often the smallest, most marginalized groups who feel the impact the heaviest,” she explains.

As Pham notes, most people think of “bloated bank accounts” when they read about venture capitalists. However, that term also includes small, seed-stage companies like hers.

“Put simply, consumer packaged goods businesses need access to their funds to operate, and having the rug ripped from under you is hugely disruptive.” Pham adds, “Business owners trust that the hard-earned money they have in the bank will be there every day. When that changes overnight, it creates a massive disruption operationally, financially, and psychologically — especially for small teams like ours.”

Stories like Pham’s are far from rare in the fallout. Before the bank’s collapse, SVB’s website noted it worked with nearly half of all venture capital-backed start-ups in the U.S. and almost half of all venture-backed tech and healthcare companies that went public in 2022, Bloomberg reported. (The bank’s website has now been replaced with a Federal Deposit Insurance Corp, or FDIC, information page.)  So how did it go under so quickly?

How the SVB crash happened

To understand the mechanics of a banking failure, we humbly refer you to experts like those at Investopedia. But essentially, it comes down to that, like all banks, SVB took in money from customers and used it to extend loans and invest elsewhere. The assumption is that those initial customers don’t all come in on the same day asking to take out all their cash. However, SVB recently acknowledged it invested a large chunk of change in bonds and lost about $2 billion when it sold them due to inflation. As Investopedia reported, on Wednesday, SVB sent an investor letter outlining its plans to recoup some of its cash. However, said investors were less than impressed, and all went to ask for their money at once — which, as we know now, wasn’t there. This led to panic about how and when companies would be able to access enough capital to avoid unwanted layoffs and continue to operate when the sun came up Monday.

But the collapse of SVB goes beyond this particular bank’s failure and shines a light on how little financial support many start-ups get, and just how precarious the system can be for those looking to gain funding or simply hoping to continue paying their employees.

Why so many food start-ups and wine producers are affected

As NPR reports, SVB became the "go-to lender for tech start-ups that appeared too risky in the eyes of larger, more traditional banks," leading many companies like Omsom to look at it as their only option.

"SVB became the preferred bank by start-ups and VC firms alike for a number of reasons," Pham explains. "They have deep relationships in the start-up ecosystem and their services were specifically designed for early-stage, high-growth companies."

Stefan Kalb, the founder of Shelf Engine, a start-up that helps grocery stores reduce food waste using AI, tells NPR that it can sometimes be even more dire for star-tups.

"If you're a high-growth start-up, you can't get a credit card from a normal credit card provider, you can't get a loan from a big bank, but Silicon Valley Bank would give you that," Kalb says. "It's these services that start-ups couldn't get elsewhere."

Beyond the food start-up world, SVB also found a lucrative niche in the wine industry. In the mid-'90s, the bank opened its wine division and has since loaned about $4 billion to wine-centric clients, according to that pre-crash version of their website, Business Insider reports. It accounted for 5% of its lending, which is a small, but not insignificant portion of its businesses.

Rob McMillan, the bank's wine division executive vice president and founder, "basically built this lending division within Silicon Valley Bank that met the needs of the wine industry, developed wine industry expertise, and understood how to lend and support the wine industry," says Jasmine Hirsch the winemaker and general manager at Hirsch Vineyards, explaining why her family and many other family-run wineries chose the bank. Hirsch notes that while from the outside, winemaking may not seem like "rocket science" to many, it can get complicated. SheMcMillan and his team at SVB took the time to understand how to value bulk wine, inventory, and vineyard development better than most.

"Having a partner that understands that timeline and how to support you through borrowing is crucial," she says. "They're not the only lender anymore, but it was a concentration of expertise."

What's happening next for these small businesses

Though the U.S. government initially declined to bail out the bank, it quickly changed course Sunday evening to stop a snowball of bank failures. However, Treasury Secretary Janet Yellen emphasized that the only people the government would be protecting are depositors, not the bank or its shareholders.

"Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place means that we're not going to do that again," Yellen said on Face the Nation on Sunday. "But we are concerned about depositors and are focused on trying to meet their needs." According to the U.S. Treasury, the Federal Reserve, and the FDIC, none of the money will be coming from taxpayers, NBC reported.

But, as Hirsch explains, this is far from the end.

"My concern now is, where do we go for credit," Hirsch says, noting her vineyard had funding lined up via SVB for planting new vineyards. "We don't know what's going to happen to SVB's lending obligations. We don't know what will happen to our interest rates and what this will mean for the wine industry's ability to invest."

Like many on Monday, Pham says she's working with investors and advisors to find a new bank and that despite it all, there has been one silver lining to this crisis.

"Watching our community rally, anchor, and grow in the last 48 hours has been so humbling and energizing," Pham says. "Our focus now is how can we prevent this in the future and how can we continue to show up for our amazing community, our ride or dies."

Though Hirsch says she doesn't believe the threat is "existential" anymore, she notes, "it's a shakeup for sure," adding that, like the rest of us, "we'll see what happens." 

Additional reporting by Ashia Aubourg

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