SVB Capital Owned Pieces Of Top VC Firms. With A Sale Ongoing, Their Future Is In Flux

Firms like a16z, Index and Sequoia can usually control who buys a stake in their blue-chip funds. But with SVB Capital for sale, they’re in a rare powerless position unless their stakes are split up for separate sale.

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Amid the many questions arising from the collapse and ongoing sale of Silicon Valley Bank, there is one that’s top of mind for many investors: what will happen to one of the bank’s “crown jewels,” its ownership stakes in some of tech’s best-known venture capital firms including Accel, Andreessen Horowitz, Index Ventures and Sequoia.

Venture capital firms typically tightly control who can invest in their funds, and selling a stake usually requires approval by the firm itself. But the situation at SVB Capital, a subsidiary of SVB Financial Group (the former parent of SVB until the bank was put under FDIC control), is unusual—and more complex. And it leaves the blue-chip VC firms in a rare position of potential powerlessness, stuck waiting to see how the sale process plays out with little control over who buys SVB’s stake in their business.

Forbes spoke to a number of legal and finance experts, limited partners and investors for this story, and contacted all 15 VC firms featured on SVB Capital’s website. Those conversations affirmed that if SVB’s sale were to parcel out fund positions one by one, the affected VC firms would maintain their approval rights. But unless the firms held an unusual provision in their agreements with SVB that would give them more say in the sale process, they won’t have the ability to block a sale of the SVB’s venture portfolio as a whole.

SVB Capital has said that its funds were not part of its parent company’s Chapter 11 bankruptcy proceeding. According to a letter published by Fortune, the bank said it would continue “ordinary course operation” of business despite being “in the early stages” of a sale process. A spokesperson for SVB Financial Group declined to comment for this story.

Like the VC firms it also backed, SVB Capital was investing capital on behalf of its own limited partners, while employing more than 30 people under president John China. Among SVB Capital’s reported $9.5 billion in venture assets weren’t just VC fund positions, but also a startup portfolio that included stakes in unicorns Chainalysis, Modern Treasury and Shield AI, according to startup funding tracker PitchBook. The sale of such startup stakes from one investor to another is relatively straightforward.

Since the days when a still-private Uber attempted to keep shareholders on “lockdown” from cashing out, some companies, like SpaceX, conduct periodic tender offers to allow insiders to sell shares while maintaining control of who buys them. But often, startups don’t have such control over what happens to their investors’ stakes. When a fund is purchased outright, as happened with Seedcamp in 2017, or a portfolio is exchanged, like happened more recently with NewView Capital from NEA, entrepreneurs aren’t required to be in the know (and may choose not to engage or share information with their new shareholders).

VC firms are typically more stringent. They can’t stop a limited partner from selling, but they can usually guide the process to a buyer they want, often an existing backer. Firms don’t want to work with investors who aren’t committed for years and funds to come; they may also avoid those with ethical or political concerns, such as certain sovereign wealth funds. And some VC firms shun groups like pension funds that require public filings or are subject to FOIA requests that would disclose the firm’s underlying results, said Ilya Strebulaev, a professor of finance at Stanford’s Graduate School of Business.

That would be the status quo if SVB Capital sold its stakes in venture funds à la carte, with the firms having considerable leverage, added Matthew Rhodes-Kropf, a visiting associate professor of finance at MIT Sloan and a managing partner at Tectonic Ventures. “Almost certainly they have rights of approval. Mine have very clear, ‘I can keep you out’ rules. I can’t imagine the good ones don’t have that,” Rhodes-Kropf said.

Several sources close to SVB Capital portfolio firms confirmed that such rights were in their limited partner agreements, or LPAs. None knew of any additional, firm-friendly provision that would add restrictions in the event of the sale of the limited partner (in this case, SVB Capital as a whole) itself. “I have seen it, but it is rare,” said Marie DeFalco, a partner specializing in fund formation and structuring at law firm Lowenstein Sandler.

If any firm had such a provision, it’s most likely to be Sequoia, multiple sources said. According to a report in The Information, which cited documents it reviewed, SVB Capital’s positions included more than $230 million in Sequoia funds, the most of any firm, followed by $170 million-plus for Andreessen Horowitz, and more than $100 million for Ribbit Capital. Those firms, and 12 others—83North, Accel, Bessemer Venture Partners, Engineering Capital, Felicis, Frazier Healthcare Partners, Greylock, Index Ventures, Kleiner Perkins, Redpoint, Spark Capital and Zetta Venture Capital—didn’t respond or declined to comment in response to Forbes’ requests.

The only exception: PivotNorth, where Midas Seed List investor Tim Connors said his firm had yet to block such an LP position from changing hands. He spoke out in support of China and SVB Capital’s track record with underrepresented fund managers. “Hopefully the acquirer will keep the team together as is and it will be business as usual,” Connors wrote by email. “Even better is if the acquirer has a big asset management business, so John could have 10x to 100x the capital to put to work.”

Several were willing to speak anonymously to confirm their own agreements lacked any provision for a company-wide sale. “They don’t have to tell us, but we hope they would let us know,” said one.

Based on Forbes’ conversations, the firms are cautiously optimistic that a buyer will maintain business as usual, especially if it’s another bank or financial institution. “They deserve the best outcome,” said one partner whose firm was backed by SVB Capital. History—going back to the 2008 financial crisis—provides examples of how a sale could go either way. In 2009, failed bank Washington Mutual sold stakes in six VC funds to Industry Ventures, which absorbed them under its brand. That was a more hands-on process where the VC firms were actively involved, said a source familiar with the process.

But that same year, the venture group of failed Lehman Brothers spun out under a new brand, Tenaya Capital. Partner Tom Banahan, who helped oversee that transition, said he saw similarities today in SVB Capital’s team and track record, should the group be able to pursue a similar route. “That’s how I entered our negotiation: with an attitude that we deserved to survive,” Banahan told Forbes.

Whether a quick extrication of SVB Capital is possible, however, could depend in part on if its sellers would prefer to use it to entice an entity to buy all of SVB’s sister companies outright. “I am still stunned that no one has bought SVB Capital yet,” said Rhodes-Kropf at MIT. “These are the crown jewels that are easy to sell.”