Q&A: Building an Innovation Practice in a Post-SVB Market

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David Sabow (Julia Midkiff/PitchBook News) In the wake of the Silicon Valley Bank collapse, regional and global banks are racing for tech clients around the world.

One such contender is HSBC. After buying the UK branch of SVB for £1 (about $1.25), the UK-based bank, founded more than 150 years ago, sought talent from the defunct lender to establish a dedicated banking practice focused on the economy of innovation.

We spoke to David Sabow, a former SVB executive who now heads HSBC’s healthcare and technology business, about how the bank is building its technology practice and the opportunities that can be found in today’s marketplace.

PitchBook: How are you building your technology proposition to set HSBC apart from the competition?

Sabow: The goal is not to duplicate what has already been done, but to create a unique value proposition for customers.

We will focus on providing a holistic offer to the innovation ecosystem. We hope to amplify the venture debt practice that already exists in the US for HSBC and transform it into a venture banking practice for early and late stage companies. This includes cash management, unique lending structures, etc. We’ve also brought in a lot of people who have a real sub-sector specialization in areas like biotech, enterprise software and fintech.

Where we are also trying to differentiate ourselves is on the international side. Over the last decade, more companies than ever are thinking about their international markets, customer supply chains, long before I started my career. Now, we don’t want to limit ourselves to that, because we’re going to have incredible companies that are very UK-centric or US-centric, for example, but that’s increasingly a big part of how entrepreneurs and founders are thinking about it. It’s also a big part of how investors think about using their capital. A number of funds, not just large-scale platinum venture funds, but also mid-sized innovation funds, tend to have a very global mindset.

What are startups and VCs looking for in a bank or lender?

Building a startup is inherently an already risky value proposition. Your banking business doesn’t have to be part of your risky value proposition. Of course, in light of recent events, financial stability, size, scale, fortress balance sheet, this is really what is at stake for any component of a banking relationship.

Now, if you, as a bank, are just there for the transaction, when the company is scaled down and de-risked, that’s fine and some institutions do. But I think the most important relationships are not formed in the transaction or rudimentary financing needs, but in the added strategic value you can bring.

Being able to leverage your network to introduce companies to a client, investor, or simply a colleague who can make recommendations can make all the difference. I think institutions that do it well will be more successful in the future.

How do you deal with the growing competition for the technology business?

Competition is a good thing. I really don’t think there should be one dominant vendor. There are billions of uninvested capital in the global venture capital ecosystem, most of it raised in the last three years. That capital will be distributed, maybe not tomorrow, but as we look at the next three to five years, that capital will absolutely find its way into companies. Supporting existing businesses, as well as building new businesses, is a huge market that requires a healthy number of partners to support it.

What I think is different maybe in this environment going forward, is I think there’s going to be a lot of new cooking partners for these companies, especially as they grow. They will perhaps want a couple of different institutions that meet various aspects of their financial needs, so there is an opportunity for numerous institutions to support different businesses along the way. Obviously, we’ll try to develop something that’s very unique and adds a different value proposition, but I think it’s a big enough market for several healthy players to thrive on, and frankly, I think the market needs that.

How do you see the risk debt market going forward?

It’s pretty cool. We are seeing a slowdown in the speed and size of risk debt rounds being distributed. In some ways, it’s almost counterintuitive, because as we see the valuation squeeze, which is particularly pronounced in later stages, we assume that the search for non-dilutive sources of capital would actually be even more sought after.

I think in the context of market volatility, both entrepreneurs and the board members who advise them are very careful with their capital structure and make sure that it’s not just runway, but make sure they have a capital structure that creates optionality for them.

Long term, I know that finding venture debt solutions and creative financing solutions to increase share capitalization will continue to be a really important part of how innovation is financed globally. But I think in some ways, the reset or pause in terms of risk debt distribution velocity ultimately will be healthy for the ecosystem and certainly appropriate in the context of some of the volatility that we’re seeing right now.

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