JPMorgan promotes Silicon Valley bank alternative for startups

3 years ago JP Morgan Chase Executive Doug Petno was at a party in New York City celebrating the retirement of a colleague when his boss, Jamie Dimon, called him aside.

It was March 9, 2023, and customers of a West Coast lender known for its services to startups were withdrawing their savings en masse.

“Jamie looked at me and said, ‘pick up the phone,'” Petno told CNBC in an exclusive interview this week.

Regulators had an urgent question: “Is J.P. Morgan interested in acquiring Silicon Valley Bank?”

The next day, California financial regulators seized SVB, completing the sudden collapse of the institution at the heart of America’s startup community. Over the weekend, Mr. Dimon, Mr. Petno and other JPMorgan executives repeatedly considered whether to buy the bank, which had just lost $42 billion in deposits. They decided against it. One reason is that thousands of SVB customers had signed up for JPMorgan accounts in a flight to safety.

“We had three years’ worth of new customers over the weekend,” said Petno, co-head of JPMorgan’s commercial and investment banking. “Our onboarding team was working around the clock to open accounts.”

Encouraged by what they were seeing, Petno came up with an idea: What if JPMorgan could build a real competitor to SVB, as well as Brex, Lamp, and Mercury, startups that have carved out a profitable niche for founders and venture capital investors?

“We went to the board and said there’s a void in the market,” Petno told CNBC. “At that exact moment, everyone saw an opportunity.”

For JPMorgan, already a financial titan on Main Street and Wall Street, winning over West Coast rivals in the more specialized field of emerging banking means more than winning deposits. It’s both a key part of the growth strategy for the bank, which had more than $180 billion in revenue last year, and a way for the New York-based lender to stay close to developing its own technology.

With a technology budget of nearly $20 billion this year, JPMorgan aims to not only better serve its startup customers and venture capital investors, but also learn from them. The company is closely monitoring Silicon Valley startups for solutions to problems facing banks themselves, from cybersecurity to quantum computing.

In fact, when a JPMorgan client announces AI-related layoffs or expense cuts, the company often sends a team of bankers to investigate the client’s efforts, Petno said.

Typically, bankers find that the introduction of new AI agents is only part of the reason for job cuts, with other factors such as overhiring and inefficient processes accounting for the rest, he said.

JPMorgan launched its startup banking business in 2016 after noticing a technology-focused rival while expanding westward. Initially, it only served larger, more mature startups.

Part of the reason, Petno said, is that banks didn’t yet have the digital banking solutions that young founders in particular were craving. There also weren’t enough investment bankers at the time to target small, risky startups.

Investors told CNBC that the view of JPMorgan in some parts of the venture capital community has long been that it takes too long to open an account or that resolving payment issues requires a lengthy branch visit.

“They want to go to a website to open an account, and if it takes more than 15 minutes, that’s it,” Petno said.

But in the weeks following SVB’s collapse, Petno and his team moved quickly to hire several key people from SVB, including John China, then president of SVB Capital, who now heads JPMorgan’s Innovation Economy business with Andrew Kresse.

By late April 2023, JPMorgan found itself considering acquiring another hurting California-based bank. The company’s successful bid for First Republic was also in response to requests from the technology community.

With new learnings from SVB and First Republic’s banking operations, JPMorgan will double its startup banking revenue in 2023, the company said.

Despite the focus on digital banking, startup founders still occasionally visit Chase branches to deposit large funding checks into their savings accounts. Now, when that happens, Petno says, JPMorgan’s system immediately moves that customer to the startup team.

JPMorgan has now quadrupled the total number of customers in its business to nearly 12,000, served by 550 bankers on both coasts, all of whom draw resources from different parts of the company, the lender said.

Founders and venture capital investors are clients of private banks, while startups are covered by commercial banks, and venture capital funds are another client, primarily in businesses acquired from First Republic.

JPMorgan did not provide specific sales numbers, but Mr. Petno said the growth rate in the emerging business was “dramatically higher” than the bank’s core business.

Still, Petno is still not satisfied with the company’s digital banking services for startups, and described projects underway to overtake competitors.

In addition to SVB, currently owned by First Citizens Bank, and startups Mercury and Lamp, other competitors in this space include: Stifel and customer bank. In January, Capital One acquired Brex for $5.15 billion.

Because most startups fail, JPMorgan looks to identify companies it expects to win its bets and develop relationships with them early in their lifecycles, as SVB did.

In doing so, we are able to not only provide core banking accounts, but also provide valuable investment banking advice along the way.

JPMorgan’s ultimate vision is to become a one-stop shop for founders’ needs, from seed round to IPO and beyond, including international expansion.

“Once you join, you’ll never be able to top JPMorgan, from the unicorns to the Magnificent 7,” Petno said.