Melissa Smith (Caroline Suttie/PitchBook)
Many startups' balance sheets aren't looking as healthy as they did two years ago. The tough environment is prompting investors and lenders alike to offer different advice than founders might be used to hearing.

Such as: take the capital you can get—at a down round, even with a liquidation preference—if that's the only way you can fight another day.

That's the advice that Melissa Smith, managing director at JP Morgan and co-head of its innovation economy unit, gives to founders. Smith leads JP Morgan's competitor unit to Silicon Valley Bank alongside John China, whom JP Morgan poached from SVB shortly after its March collapse, along with some 20 other SVB bankers.

Smith sat down with PitchBook to discuss the SVB crisis, venture debt and startup survival. This interview has been condensed and edited for clarity.

PitchBook: What was the weekend of SVB's collapse like for you? 

Smith: I think many people across the ecosystem have PTSD from that weekend. It was hectic, definitely. We started hearing rumblings earlier in the week, getting more phone calls from clients looking to move accounts over to JP Morgan. When the bank run happened, we were very clear with our team that we didn't want anybody making any outbound phone calls—we were only reacting to clients calling us.

For the next couple of weeks, we focused on accelerating our business plan for the innovation economy. That meant hiring new resources (and) dealing with the influx of clients that came our way.

This image of JP Morgan as a ‘port in the storm'—is that also how you think about J.P. Morgan's market advantage for startup banking?

I think it's one small aspect of it, right? Naturally during a crisis, we see portfolio companies, venture capital firms, middle market companies gravitate toward JP Morgan, for the safety and stability. To me, that's kind of a given. It's table stakes right?

But our team isn't just a post-March focus. We've been building this business since 2016 and we very much want to be the leading banking partner to the innovation economy ecosystem. 

For a long time, we have benefited from the Series C and beyond companies outgrowing their existing banking partners and coming to us. Maybe they were expanding internationally, they had larger sized financing needs and they needed access to the capital markets, whatever the reason. 

Then in 2016, we took a very hard look at what we could do to better build out our capabilities to serve the very early stage. We've built out subsector expertise on our banking teams, and then since March, we've built out the startup banking team which focuses on the earliest stage, on seed and pre-seed.

Since SVB, you've added a ton of new bankers from SVB, including John China, your co-head of the innovation economy. What are they bringing to JP Morgan? 

We are trying to build something that hasn't existed. We can do so much more for high-growth companies than any of our competitors have previously been able to do.

We can offer connections between startups and much larger sized companies that we serve in our investment bank. If you're a healthcare IT company, for example, something that's very valuable is networking with not-for-profit hospital systems who may use your technology. We can provide that.

Why should a founder choose JP Morgan over a neobank where they'd potentially be a more significant client?

Yes, founders may have the mentality of gravitating to a neobank, but in general, those fintechs can only serve very specific needs: they can open a bank account and do simplified payments.

What we're offering is a banking partner that can really be with you through every stage of your life cycle.

Some investors have predicted that the second half of this year is going to be a ‘doomsday' for many startups. Do you share their concerns, and are you noticing any early warning signs in deposit activity?

I wouldn't use the word doomsday. But do I think that it will continue to be a challenging fundraising environment in the second half of the year? Do I think that there will continue to be a correction from the heydays of 2021 when capital was kind of free for anyone? Yes, and yes. We're not returning to 2021 any time soon.

People are starting to run out of runway. There's still a decent amount of activity in the private placement market, where capital is available. Obviously, a lot of that is coming in a down round, but one has to be willing to swallow that pill.

There's a lot of additional structure being put on transactions, but I do think that for the right valuation and the right structure, the capital is available. 

The good news is that we are seeing some signs of life in the IPO market. Obviously, if you're a seed stage or series A company, that may seem a distant way off. But that just provides greater and greater confidence to the VC community and the ability to exit later-stage positions and thus recycle money elsewhere.

Accepting additional structure can make things complicated later down the line for the founders of companies that do survive. How should they navigate that?

If the option is, taking the capital now to get to fight another day and get me through the next year or two years, trading that off with a much more complicated cap table going forward, that's a fairly easy trade from my perspective.

I would be more focused on making sure I'm doing my diligence on an investor partner, rather than having a massive adverse reaction to the structure and the terms. When you're in a better market environment, you can always refinance out of that existing structure.

What are you noticing in the venture debt market?

Activity has definitely slowed overall. Companies tend to start thinking about utilizing venture debt when they're raising a new round, so activity overall feels more muted, just because the fundraising environment is more muted.

And even though there are more non-bank lenders in the market since the SVB collapse, we haven't really seen that come to fruition in terms of deal volumes yet.

How are investors feeling about venture debt?

There is more cautiousness around a consumer-retail facing business, just given the ever impending recession that everyone's still waiting for.

It is much more about how a company is performing, is it the appropriate time for them to put debt in the capital structure. You obviously have companies that are running out of runway that think venture debt may be their only option, which I would argue may not be the most prudent time to take on debt.

How a lot of partners articulate it to me is that venture debt takes some discipline away from the companies in terms of their focus on financial performance, path to profitability, the day-to-day running of their business.

Some have gone so far as to say, well, they're not standing in the way if the company is going to do it, but the board will tell them, ‘don't draw down on it.' 

This article originally appeared on PitchBook News