News

As venture capitalists and tech founders traded frenzied WhatsApp messages that fuelled a historic run on Silicon Valley Bank on March 9, other important clients of the lender were toiling in the dirt, oblivious to what was coming.

Jasmine Hirsch, general manager of Hirsch Vineyards in Sonoma, said she only found out about the $42bn bank run from a family contact in finance the day before the lender was rescued by federal regulators, having had no foreknowledge of its problems.

“We were not in the VIP group chat,” she said.

In the weeks since she has been bemused by comments that SVB’s customers should have done more due diligence on the bank.

“I’m like: ‘When was the last time you looked at your bank’s balance sheet?’” she said. “Like, we’re farmers! We trust that our bank will be there tomorrow.”

With SVB being sold off in parts by the government, vintners in the fertile wine regions north of San Francisco risk losing a vital partner. SVB’s wine division has been a critical pillar to the sector, loaning out more than $4bn to wineries since 1990 and publishing an annual State of the Wine Industry report that has grown so popular it receives coverage in the New York Times.

Paul Mabray, CEO of Pixwine, a wine discovery platform, called the wine division the “gem” of the bank, adding: “It was really ingrained in the community.”

When it collapsed, SVB was sitting on $1.2bn of winery loans. Now its clients worry about where their funding will come from as they grapple with higher costs of doing business and the worsening impacts of climate change.

Their worries are well-founded. The wine business is notoriously risky, low-margin and painstakingly slow. One reason it worked for SVB was the prestige it conferred.

“Startups and wine — the two connect really well,” said Alessandro Chesser, who worked at SVB a decade ago and has banked with it since. “SVB would get wine from wine customers and then send start-up customers wine.” 

An executive at a top VC fund recounted asking SVB to sponsor an event. ‘Why don’t we just provide the wine?’ came the reply. “There was a clubbiness to it,” they added. “A New York or London-based bank would not offer wine for your event.”

Another venture investor said providing loans to wineries was all about the relationships it could generate — the opportunities to underwrite deals or draw in deposits.

“They are all passion projects,” this person said of vineyards. “You would [bank them] if you care about the owners of those wineries — which are VCs.”

The fate of SVB’s wine division is unclear. A buyer less reliant on those technology relationships may not feel tempted to take it on, nor is it obvious that it can operate as a standalone unit.

The marketing director of a wine company in Napa, who did not want to be named, said they were confident the wine division would find a buyer.

“This industry is full of solid assets — dirt, grapes, brick and mortar — so it’s hard to imagine those not being appealing to whatever bank picks up the balance sheet,” this person said. “Much more, I’d think, than tech start-ups.”

Not everyone shares that sunny outlook. Wildfires and a global pandemic have hit tourism, which before Covid could account for more than 50 per cent of sales for some small wineries. Silicon Valley Bank’s own wine expert Rob McMillan, who founded the division 32 years ago, wrote on his blog in October that “the mood in the industry has turned decisively negative versus last year.”

In SVB’s latest annual report, published in January, he diagnosed a long-term crisis: younger people were eyeing healthy drinks like kombucha more than cabernet or merlot.

The wine industry overall had grown 20 per cent a year in the early 2000s, but growth fell to 10 per cent in 2010, was stagnating by 2016, and for the past two years it has shrunk. The only consumer segments prospering were those aged 60 to 90.

McMillan lamented to the New York Times in January that the industry’s inability to appeal to Millennial consumers was “worse than I thought,” adding: “I’ve been talking about this problem for seven years and we still haven’t reacted.”

Now the crisis is more acute — and personal. In a blog published on Sunday, McMillan reflected on “one of the worst weeks in my life.”

“All I knew was I’d lost a substantial amount of money in the bank’s stock, and the FDIC had given me a 45-day contract to work for them. That will make anyone nervous,” he wrote.

He predicted that a buyer will reach “a formal solution within the next three weeks,” adding that he and division manager Jed Taborski have taken more than a dozen calls from “seriously interested organisations” considering the wine division as a standalone purchase.

Some existing clients would love that. Hirsch said she opened a new bank account the day the federal regulators took over SVB, but she has yet to deposit funds there. Her biggest hope — shared by many others who benefited from SVB’s close relationships and personalised service — is that she does not have to.

“Everybody’s kind of saying like, isn’t this the safest place to be right now?” she said, citing letters from SVB saying it is open for business, honouring loans, and looking for new business.

In the meantime, some in the community cannot help but feel the whole situation could have been avoided if Tech Bros along the coast had just stayed calm and not pulled their money from SVB en masse.

“The navel gazing insularity of that world — they brought their own bank down!” said one vineyard executive who didn’t want to be named. “What’s so ironic is it’s just classic tech bullshit. I mean, no offence or anything, but don’t you think tech kind of ruins everything it touches?”

Articles You May Like

Competition in the housing market is cooling off. Here’s why
Munis somewhat weaker, UST yields rise
Houston City Council passes fiscal 2025 budget
Jay Powell sends mixed rate signal to borrowers — and Joe Biden
Benjamin Netanyahu denounces Israel military’s ‘tactical pause’ plan