David Sabow, head of US Innovation Banking at HSBC, on the future of the global innovation economy

David Sabow had been with Silicon Valley Bank for over a decade when he headed to London to become CEO of SVB UK in March of 2023. A few days later, the bank collapsed over the course of just 36 hours.

Sabow got to work, saving the jobs of the 700 U.K. employees by selling the company to HBSC. Finding himself at a crossroads, he proposed the bank expand its innovation operations to the United States.

“Being relevant to the global innovation economy requires you to be a relevant player in the U.S,.” Sabow said at a Feb. 12 Dean’s Speaker Series event at Berkeley Haas.

Out of that crisis came U.S. Innovation Banking, HSBC’s dedicated banking practice focused on the innovation economy. But figuring out what it meant to question the status quo during a time of uncertainty required patience and a whole lot of confidence without attitude.

“Innovation is the most overused, least understood word. What is innovation? Maybe my socks qualify as innovation,” he joked. “The way we think about innovation banking under the umbrella of HSBC is that we want to have a proposition for the most disruptive technology in healthcare startups that makes the banking simple for them.”

Sabow discussed his decades-long career in banking and what he calls the “three ring-fenced elements of innovation banking”—great alignment, high-touch client service, and go-to-market strategy—in conversation with Olivia Halas-Dias, MBA/MPH 25, and Punit Vyas, EWMBA 27.

While he’s become a seasoned professional in Silicon Valley, Sabow’s career path wasn’t exactly linear. When he finished his undergrad at Santa Clara University, he got to the last round of interviews at Accenture, then known as Andersen Consulting. Noticing the burnt-out employees and high-stress environment, he changed course and joined AmeriCorps, where he ran an eviction prevention revolving loan program at a homeless shelter in Juneau, Alaska.

“I learned a lot about the circumstances that can lead to poverty and was exposed to something that I’ve been so blessed to not have experienced directly. And it gave me a different appreciation and perspective,” he shared. “The unintended consequence is that while I was interviewing for investment banking positions and everything else, I had a very different story to tell than the typical candidate.”

After subsequent stints as a ski instructor in Colorado and building houses for a year, he headed back to the Bay Area, where he started a career in commercial banking and then investment banking, with roles at Canaccord Genuity and SVB. During more than 10 years at SVB, he led the U.S. and North America healthcare divisions, where he integrated internal operations that drove record business growth in the bank’s innovation portfolio.

A new hurdle came with the establishment of HSBC’s U.S. Innovation Banking group. Following what he described as a “wartime leadership model,” where decisions were made quickly and “everyone was responsible for getting their hands dirty,” their team saw greater rates of productivity.

“It wasn’t a job. It was a mission. It was so much deeper than stock options and employment,” he said. “And that same sense of purpose, we’ve tried to channel as we’ve begun our next creation story, which is: Why are we doing this?”

As he’s continued to question the status quo, he’s had to keep a students-always attitude, always thinking about whether the organization is looking around corners and being creative enough throughout its operations.

“There’s nothing harder or more meaningful than creating something,” he said. “I do have a taste of what it’s like to put your reputation on the line, put a plan together, and then go for it…The most you’ll ever learn is by doing that.”

Transcript

ALEXANDRE MAS: Hello, everyone.

[LAUGHTER]

Happy to have gotten your attention there. I’m Alex Mas. I am Associate Dean for Academic Affairs at Berkeley Haas, and I am here on behalf of interim Dean Jenny Chatman, who was called away today. I am thrilled to introduce our guest, David Sabow. Welcome.

[APPLAUSE]

David has worked in innovation banking his whole career. In 2023, he founded Innovation Banking group at HSBC. I’m sure many of you have heard of them. They have a big footprint here in the area. Through his leadership at HSBC, they’re growing their support in connection of founders and investors in the rapidly evolving technology, life sciences, and healthcare economies. These are all things that we do a lot here at UC Berkeley.

Prior to HSBC, David began his career at Canaccord Genuity and later joined Silicon Valley Bank. David ran the technology and healthcare business at SVB North America, where he integrated for 10 years—where integrated internal operations drove record business growth in their innovation portfolio. David holds degrees from Santa Clara University and the Tuck School of Business. In his spare time, he serves as the president of the Board of Directors for the Kelly Brush Foundation, which is an organization dedicated to inspiring and empowering people with spinal cord injuries to lead active and engaged lives. I’m really excited to have you here today because we have a lot of students in this room who are interested in finance and entrepreneurship. And I’m interested and keen to hear your insights on how our future finance leaders can question the status Quo in innovation banking.

I will now turn it over to MBA students Olivia Halas-Dias and Punit Vyas both, who are excellent students of mine and past classes who will lead today’s discussion. Thank you.

[APPLAUSE]

OLIVIA HALAS-DIAS: Thank you. Thanks for being here today. David I’m Olivia Halas-Dias. I’m a second-year full-time MBA and PhD student.

PUNIT VYAS: And I’m Punit, a first-year EWMBA. And thanks for being here today. And can you tell us a little bit about your career journey, and how did you end up at your current position?

DAVID SABOW: Yeah, of course. First of all, thank you so much for having me. And that was maybe more time on my background than I deserve. I know this is being livestreamed. And so, anything that I share with you, anything I’ve accomplished, anything I’ve learned came from my wife, who is watching this right now. And, Alexis, I know you’re watching this. So those of you who are married will understand that. So, look, I’m excited to share what I can about what has been a bit of a circuitous route.

And look, my career journey was very nonlinear. I took the road less traveled. After college, I volunteered with AmeriCorps for a year. I was a ski instructor in Breckenridge. I built houses for a year. My parents completely had given up on me. And then, I found my way out to the Bay Area and into commercial banking, then investment banking, and then had an incredible journey at Silicon Valley Bank, which was really just a wonderful experience, except for about a 48-hour period that I’ll let you guys guess which window that was. I’m happy to share more about the origin story of HSBC innovation banking. But I’ll follow your lead.

VYAS: I think you should. Thank you.

SABOW: Sure. So we internally refer to it as March Madness 2023. So, we had a little period of March Madness. And I was just sharing with Olivia and Punit, just moments ago. My journey was interesting in that. I had just moved to London in January of 2023 to become the CEO of SVB UK. And fortunately, my family had not moved yet. They were still here in NorCal—kids were finishing school. And my goal was to get through the Bank of England approval process, which is pretty involved. Figure out how to drive on what I’ve used the wrong side of the road, get settled in.

And I had just come back for a visit to my family in March, the Wednesday before SVB failure landed Wednesday. Spent all Wednesday night, all Thursday night, and most of Friday morning dealing with both the U.S. and the U.K. dynamic, everything. The bank failed officially on Friday morning. I got on a flight back to London, where essentially SVB UK was a separate legal entity, separate bank, own balance sheet, own products, own board of directors, own everything.

And so, we were not part of the FDIC bridge bank that had been put in place to stabilize and find a solution for SVB in the U.S. So, we engaged an investment bank in over a call, it, 36-hour period, sold SVB UK to HSBC, signed the deal at like, 4 a.m. Monday morning. And we negotiated a price of £1. So, not my best negotiating. Som I’m not going to teach a course on negotiation anytime soon. But the beautiful part of it was that we had, 700 people, give or take, that lost their job on Friday and were rehired before business started on Monday.

And that was a huge deal for us. It was the current CEO at the time, Erin Platts, was an absolute master navigating that. And the whole team was still intact, with zero taxpayer support required. So it was a good outcome. And two days after that, I had a chance to meet Noelle Quinn, the global CEO, and he said, ‘What the heck are we going to do with you? You’re not approved by the Bank of England. We’ve done some checking on you. And you seem like you’re respected. And you’ve done a lot of things. What should we do next?’ And that’s where I made the pitch that we should build something in the U.S., that being relevant to the global innovation economy requires you to be a relevant player in the U.S. And so, we got started putting a plan together and brought about 40, 42 people together in April to get this started. And I can’t believe that was almost two years ago.

VYAS: Thank you.

HALAS-DIAS: Following up on that. So quickly hectic transitional time it sounds like. What leadership styles did you employ in communicating to the people who worked for you and above you and who your new coworkers?

SABOW: During that period?

HALAS-DIAS: During that crazy period.

SABOW: During the crazy period. I feel like the crazy period is maybe still going. But that’s a longer conversation. Look, you probably have studied or heard about wartime leadership versus peacetime leadership. And without really talking about it or being intentional, I think myself, my colleagues, we just went straight into wartime leadership. Everyone’s responsible for getting their hands dirty. In the case of that period, it was a lot of customer calls, a lot of talking to the venture capital ecosystem, a lot of talking to employees. There’s always this desire to provide comfort and to say something you know they want to hear. But that candor of transparency and the most powerful words in business and leadership is: I don’t know. But as soon as I know, you’re going to know. And it was, in some ways, maybe the best I’ve ever seen the people around me operate.

The sense of purpose, the sense of, we knew every call we were making, every effort to try to keep this thing alive was—it wasn’t a job. It was like a purpose. It was a mission. It was so much deeper than stock options and employment. And that same sense of purpose, we’ve tried to really channel as we’ve begun our next creation story, which is: Why are we doing this? Why does this matter? Why does this matter for the economy? Why does this matter for founders? How is this going to be important for the global ecosystem, if we can have this larger, stable franchise building something? So, yeah, I mean, transparency. Speedy decision-making—and lots and lots of empathy.

HALAS-DIAS: Thank you.

VYAS: You touched upon this in the previously, the meeting that you had with the group CEO and how you spoke to him about the relevance of being on the U.S. side. And even the name ‘Innovation Banking’ was new. So, can you tell us a little bit more about what is innovation banking from the transition perspective after you joined HSBC? And also, what are the strategies you’re using in your current role to move forward in this large financial institution?

SABOW: Sure. I mean, innovation, Sarah, where she is, we were talking about this walking in here, it’s the most overused, least understood word. It’s like, what is innovation? Maybe my socks qualify as innovation. The way we think about innovation banking under the umbrella of HSBC is that we want to have a proposition for the most disruptive technology in healthcare startups that makes the banking simple for them. So supporting them with the basics of a checking account, Treasury management, asset management, credit cards, all of those kinds of basic things up to the more interesting venture debt financing, strategic introductions to investors, and acquirers, good advice, bringing in their finance team for them.

And having that holistic proposition around the products, the solutions, the client service to support entrepreneurs at every stage of their growth, both at the series a cash hemorrhaging I’ve got a big idea up to global multibillion-dollar-scaled enterprises. So that’s how we think about it. The thing that we’ve done when we really said, when Noel Quinn, who was the CEO at the time, ‘the cool part about that period is that nuance had left the building.’ It was like there was no dancing around things. We had just lived through. And in many ways, we’re still living through a pretty horrific personal and financial crisis at that period. And the nice thing is that we got straight to the point. And I said, ‘Look, don’t just be another big bank that comes in and creates a little innovation group that is stuck into a normal corporate banking practice and does everything the same way for a startup that they’re doing for some scaled cash flow positive corporate enterprise. Don’t do that. If that’s your ambition, then hire someone besides me. I have no desire to do that.’

And what we got great alignment around and what to HSBC’s credit has been really the kind of true north since we put this together is a dedicated credit policy, so we can actually do venture debt at scale. We’ve got a portfolio of well north of $2 billion over the last 18 months. The second part was high touch client service. Entrepreneurs want to spend as little time on their banking as possible. I don’t take that personally. I think that’s us doing our job well. If we can actually make it as simple as possible, if we can give you a cell phone of someone you’ve met to solve whatever problem you have, that is super important. Because these companies and many of you who are working or building your companies, you don’t have a big finance stack. You don’t want to spend time on banking. And then the third part is this go-to-market strategy. So having a sector aligned coverage strategy that both is connected with the VCs of consequence, but also understands all the pattern recognition across subsectors like molecular diagnostics, enterprise software, fintech, biotech, et cetera.

And so, those are the three ring-fenced elements of innovation banking. And I think the fact that we’ve really protected those three elements is why what we’re building feels and looks and scales so differently from other efforts we’ve seen in the market.

VYAS: That was such an amazing answer. Because now, honestly, for the first time, I understand actually why it was so good that HSBC is now doing what it’s doing. Because I know both the brands. And the global presence of HSBC banking is only going to help this ecosystem. So, thank you, for that answer.

SABOW: I felt like a very long answer. So I’m glad you liked it. I think the great thing that I think happened and continues to happen at HSBC is they didn’t get into this business and say, ‘We look at what we’ve built. We’re the eighth-largest bank in the world. We know everything. You’re going to do it our way because we’ve been so successful.’ It was the opposite of that approach. As our CEO literally was in Berkeley in a garage, everyone talks about, like meeting an entrepreneur. We literally went to a garage with our CEO. And he had to meet a founder who had just raised $30 million Series A. He sat at the dinner tables. He heard about the pain points. He was in the market. And I remember him at a board meeting saying, ‘Anything we thought we knew about this business was wrong.’ He’s like, ‘This is so different than anything we ever even thought we were getting into.’ And that humility and that openness for us, to try and to say, like, ‘Look, you hired us because we do know this market, that’s a powerful thing.’ And sometimes, the larger a company gets and the more successful they are, the less willing they are to take that type of approach to say, ‘Maybe this group actually has a different playbook we should be open to.’

VYAS: Thank you.

HALAS-DIAS: You mentioned scaling up venture debt financing. I’m wondering if you could talk a little bit more about that and the strategy behind debt financing versus equity? I think most of us here are more familiar with equity financing when it comes to venture capital.

SABOW: Yeah, for sure. So venture debt is, think about this as ultimately, the ability to lend money to a cash-hemorrhaging company. In some cases, we’re actually lending money to companies that don’t even have revenue. So, in the therapeutics space, you can be a multibillion-dollar public company with exactly $0 of revenue. And so how you actually—well, maybe before I talk about how, it’s the why. Why in God’s name would someone lend money to a company that has no cash flow or maybe no prospects of cash flow down the road?

And ultimately, the way I explain it to entrepreneurs and executives is: If we’re not lowering your dilution, as you’re thinking about your financing journey, if we’re not allowing you to get some cushion on the other side of a milestone, then we’re not actually adding any value. And so, the way to think about it, I’ll use biotech as the simplest example. You’re running a clinical trial. You’re going to get the data for that clinical trial in September of 2025. You’ve done your cash flow forecast. You are literally out of money in October of 2025. You need to have some runway on the other side of that data, even if it’s positive, so that you can negotiate the next round of equity. You can do it at an upround at a much higher valuation. You can maybe negotiate that licensing agreement with Pfizer, or Merck, or whoever it might be. And so, venture debt is a nondilutive instrument that allows you to have some cushion on the other side of those milestones.

That’s the simplest use case. In some cases, venture-backed companies will just put something in place. They don’t draw down on it, but it becomes a little bit of an insurance policy, if you will. They’ll use it if they need it around an acquisition. Or maybe there’s a big customer that churns out, and they need a little bit more cushion to recalibrate the business to bring in new equity, to restructure things.

I’m sure the logical question is, you’re like, ‘But don’t you lose an obnoxious amount of money doing that?’ We do lose money from time to time. And part of what we do and what we aspire to do around building the portfolio is having very granular exposures in those bridge scenarios—so that making sure that a single footfall doesn’t sink the whole ship. The second part is warrants. And so, as we’re doing these investor-dependent term loans, we’ll actually take a tiny equity position. I think it’s tiny. The VCs all think it’s way too big. But call it anywhere between 15 to 50 basis points pro forma ownership in a company. And what we saw at Silicon Valley Bank, what we’re going to see as we continue to build the business at HSBC is that those warrant positions will more than offset the early-stage losses in the business. And then I think this is also where subsector specialization matters a lot because how you underwrite to a fintech is different than a traditional enterprise software company, which is different from a molecular diagnostics company.

HALAS-DIAS: Thank you.

SABOW: Sure.

HALAS-DIAS: So you sent us a report before our talk today. And it mentioned that the rate of innovation isn’t equal across sectors. So life sciences, fintech, clean tech, and e-commerce have been slower to adopt AI compared to other industries. Why do you think this is? And what needs to be done to increase innovation in these spaces?

SABOW: I mean, it is interesting to see, where is someone going from a pilot to an actual product, when is someone dabbling versus really operationalizing their business with AI? And the simplest view that I’ve been able to discern around this unequal allocation of AI across different subsectors is those areas where you might have structured or unstructured data.

But the risk of experimentation is pretty low. So think about things like MarTech or consumer businesses or something like that. I think there’s just more openness to experimentation. If you think about areas like fintech or banking where the risk of getting it wrong, where regulatory expectations are that a model is traceable and repeatable, suddenly, an LLM doesn’t work quite as well.

And I spend time with all of our US regulators. And one thing that they really like is a model that is repeatable and traceable. And we know inherently. And I think there’s different derivatives of these platforms that are getting a little bit more traceable. But that is a very high regulatory bar. And the implications of us getting it wrong—God forbid we had a credit-decisioning engine that turned out to have some bias layered into the training set. That’s a catastrophic mistake for us. And so in life sciences, if you have you’re spending hundreds of millions of dollars enrolling a clinical trial based on what an AI model has identified as the right biomarker for enrollment, that is a high-stakes game. And the implications of getting that wrong are catastrophic. So I do think AI will continue to eat the world. I do think it will be in banking. I think it will be part of in silico drug development. I think it will be everywhere. It’ll just be a little slower in those industries.

HALAS-DIAS: Thank you.

VYAS: So you spoke a lot about AI. And so there are a lot of companies which don’t use AI. So, as we know, AI investment is approaching the level of non-AI venture investment. In your current role, how do you see this shift affecting the broader innovation economy? And what unique challenges does it create for founders seeking funding outside the AI space?

SABOW: It’s an area we’re spending a lot of time on right now. And I’ll use endpoint security as an example. There are incredible companies that have developed scaled businesses around endpoint security. But they did that using technologies or threats that have existed over the last five years.

The reality is with AI, and we know that the leading adopters tend to be people with some nefarious intentions, hackers, people looking into of attacking different systems, that’s creating an entire new wave of security, security threats. And the big question we’re having is we’re looking at lending to some of these almost companies were viewed as a foregone conclusion that they had durable enterprise value.

Will they actually be able to evolve their platform to meet the new—not just using AI, but all the new threats that are going to come from AI that we don’t even know about yet? But someone does. They just don’t happen to work for a bank right now. And so, that’s the biggest challenge around that. I do think, though, some people talk about AI as a sector. Oh, well, are you investing in AI? That’s like saying: Are you investing in companies using electricity? And so, it truly is. I was thinking about an analogy. We used to, long before any of us were around, use whale oil to bring light into a room. And then electricity showed up. It was really bad for the whale oil companies. So, as you’re building your businesses, don’t build a whale oil company. You need to use AI even if AI isn’t your end product. Maybe your end product is a consumer solution. You’ve developed an amazing new laundry detergent. Use AI for your customer service, for your marketing, for your meeting management, for your finances, for all the stuff that you’re going to end up doing. And I think that’s the way that we have to think about this. I think everyone’s going to be an AI company. Just like today, everyone’s an internet company of sorts.

VYAS: Thank you. So, now that everybody has to be AI, and this next question is more around macroeconomics. So, if we look at the agentic age, so agents in AI, we all know how it’s affecting various industries, whether that be industrial or mobile. And how do you see that this new technology of agents helping us reduce the federal, what do you call that, debt to GDP ratio?

SABOW: So this is an interesting one in the context of what we’re currently navigating as a country. If you look at the trajectory, everyone’s talking about our national debt. Not everyone, but a lot of people. Has it gotten somewhat unsustainable? And I don’t know what the current metric is. But maybe looking out over the next couple of years could be, I don’t know, 110% plus debt to GDP. And as when you’re reading the same headlines I am, there’s a major cost reduction strategy across the federal government. That’s just getting started. Our view is that simply reducing costs, cutting some programs, we don’t think we’re delivering, doing other cost-cutting measures. You’ll never actually get it back even to 1:1 from a debt to GDP.

And so, the biggest predictor of GDP growth is labor productivity. And if there’s one thing that I have a lot of confidence around, it’s that AI is going to light that on fire in a big way. Labor productivity, the things that we’re going to be able to do, the amount of code that we’re going to be able to develop and innovate on, the amount of financial analysis that can be done, maybe even independent of a human, that’s going to go through the roof.

I always remind people we’re at the American online or Netscape version of AI right now. I mean, this is the worst that it will ever be. And so, there’s a huge opportunity around labor productivity. And so, the real question is: Can we actually mobilize our economy, our policies, our regulations around this technology with enough governance so we don’t implode or have any minimize unintended consequences? But enough flexibility that you can allow it to really turbo-boost GDP. And that’s I think the positive, optimistic scenario here would be that this wave of the agentic age of innovation becomes a catalyst for what could be $10 trillion of additional GDP growth over the next decade.

VYAS: Thank you. Thank you.

HALAS-DIAS: On the topic of labor: Many students here might be interested in pursuing innovation banking. What advice would you have for them?

SABOW: That’s really why I came here. Actually, this is a recruiting exercise. Look, I mean, whether it’s innovation banking, I know we were talking a lot about venture capital as well. And I think there’s nothing better. Well, one, you’re going to have a great story to tell about your education because you’re all at Haas. So you’ve got that box checked. But then create. There’s nothing like creating something.

There’s nothing harder or more meaningful than creating something. And I will not pretend that the Series A founder who put it all on the line and mortgaged their house to go build their company. But I do have a taste of what it’s like to put your reputation on the line, put a plan together, and then go for it. And it is the most fulfilling. The most you’ll ever learn is by doing that. And so I highly encourage you to have—at some point, maybe not right away, but at some point, when you have that opportunity to go put your fingerprints on something and to build something, whether it’s yours or someone else’s or a team member’s, that is a huge learning experience. It’s an incredible story. A lot of people don’t have the courage to go do that. But whether it’s venture capital, whether it’s banking, whether it’s who knows what, I highly encourage you to make that a part of your story.

HALAS-DIAS: Thank you. So, we have one final question for you. So, a team favorite we have here is, we like to leave the audience with this question is that we’re living in tense economic, political, and environmental times. But also, as we’ve discussed today, an era of accelerated innovation growth and scientific development. What keeps you up at night? What helps keep you going? And what are you most excited about?

SABOW: Alright. So what keeps me up at night? I’m always wondering, are we looking around corners enough? And I think about that through the business that we’re building. I think about that with the three kids that we’re raising. What is it that 10 years from now, I’m going to look back and be like, ‘God, how did I miss that? Why didn’t I realize that we need to do x, y, and z? Why didn’t I think about that partnership that someone just announced?’

And so, this: What are we missing? And we’re all missing things. There is something. If we had perfect visibility around the right investment, the right hire, the right time management, life would be simple. But we’re constantly missing something. We just don’t want to miss the big things. And so, that’s the thing—that sense of paranoia. Are we thinking about things creatively enough is the big one that keeps me up at night. That and our new puppy as well.

What keeps me going is this: people, relationships, sharing ideas. This is the one thing that AI can’t replace. We are tribal species. We learn from being present with one another. We learn from asking one another questions. We emulate one another. And the human connections, and especially in a time of crisis or hardship is it’s the biggest asset you will ever have. And so I would say that the team I get to work with, the amazing entrepreneurs, we get to serve. That’s a fuel for sure. And my wife who’s watching right now.

What was the last one? What am I most excited about? I mean, how many humans get to live through a wave of disruption like this. I’m not talking about the headlines and Washington and all of that. I’m talking about a fundamental shift in the laws of gravity with AI, with all the derivatives that are going to come from this agentic age, that I will not pretend to be smart enough to predict. But what a gift for us to be in the middle of living through that? And it’s a little scary. It’s scary for me, too. It’s scary for all of us who are thinking about: What do our kids need to study? What do we need to keep learning? How do we continue to be relevant? But to me, the excitement far exceeds any of the uncertainty around that. And so, it’ll be exciting to see all the implications of this technology.

HALAS-DIAS: Thank you.

VYAS: Thank you.

SABOW: Thank you.

[APPLAUSE]

MAS: Thank you so much. Thank you. So, by the way, I’m with Punit. That was an incredibly clear exposition of what you do. And I have a much greater appreciation for what innovation banking is. So, thank you, for sharing that and your other thoughts. We’re going to take questions from the room. If you have a question, you can come and line up to the mic here. But I’m going to kick one off.

Very practical question. Just so as we were talking earlier, UC Berkeley is the No. 1 university in the world in startups, venture-backed startups. We might have some current founders or future founders in this room. So, how do they know when you’re the right person to call? They may think I’m too small. I don’t need this. When does that happen?

SABOW: I mean, the reality is that everyone, myself included, has a bank account. And a lot of times, that is the bank account that we got in, I don’t know, high school. For me, it is actually the same setup. And so, as you think about, that might work for you, by the way. If it isn’t broken, don’t fix it. Moving your banking should be the bottom of your priority list as a startup. As you think about, you’re getting some seed investing in. Maybe you even have an institutional seed investor. Maybe you’re going to go through an accelerator program like YC, or Techstars, or something else. Then, all of a sudden, you have an opportunity to tap into a different ecosystem. And is your bank giving you introductions, access, insights pieces? Do you think you might need a venture loan down the road? Do you want some advice on which venture capitalists to spend time with? Who has dry powder? Who doesn’t? Who’s a player in your sector? Who isn’t? Those are all the things that we can add value around. But I think until you’re ready for that, I view that you’ve got some seed financing. And you’re really working on that product market fit. That tends to be the area where I think we can add unique value. But you should have a reason for spending time on banking. Don’t do it if it’s working for you as is. But when you’re ready for that next strategic layer of insight and connections and support, that’s when I think we can be helpful.

MAS: Thank you. Go ahead.

SINCLAIR: Hi. Can you hear me?

MAS: Yes.

SINCLAIR: Sinclair is my name. I’m an investment banker by background, and love the perspective that you gave both on your historical career, recent turbulent times, and what you see is inspirational going forward. I had a somewhat nuanced question about your response to how you paper/risk manage the potential losses of venture debt, and think about the warrant positions that you would take in respective loans that you extend. How does that get managed? Is that a part of your total portfolio management process? Is that a separate pool of capital? And then how do you think about exit liquidity associated with those warrant positions?

SABOW: Thanks. Yeah, sure. I’m also a recovering investment banker, Sinclair.

SINCLAIR: Coffee on me later.

[LAUGHTER]

SABOW: So the warrants are structured, as options essentially. So there isn’t—there are cashless exercise instruments. And they’re really built in such a way that it’s upon a change of control or a liquidity event that those can be exercised. So we don’t and wouldn’t sell those on a secondary market. There’s no private market platform for those. So, they’re just illiquid options until such time as a company gets acquired or goes public. They are managed centrally within Treasury organization. As you can imagine, given where we sit, we have a lot of material nonpublic information. You do not want me trading public stock on a warrant, given the projections, the insights we have on these companies. And it really is once those are in the money, they’re exercised. And those can be returns from professional career as small as, ‘Great, $10, I’m going to go to Starbucks with this one.’ In some cases, north of $100 million. Those were the good old days when IPOs were flying and valuations were euphoric. But we try to think about this not in quarters and years, but in decades. And most of these instruments are 10-year vehicles.

SINCLAIR: Awesome. Thank you.

YUKI: Hi. My name is Yuki. And I have two questions. First of all, I’m a commercial banker, previously in Japan and the U.S. So I was curious about how to differentiate services and products with other competitors in a venture innovation finance field? And another thing is recent changes in the banking or fintech field. I’m so curious about it.

SABOW: What was the second question again? I just want to—

YUKI: The second question is about the recent changes surrounding this, the banking or fintech area.

SABOW: So you’re right. How do you differentiate with traditional commercial banking? Everyone’s selling money. Services tend to be pretty similar. I think the real differentiation has to be, ‘What are you doing beyond banking? Can you be a connector to global sources of capital? Can you bring large strategics in to meet with early-stage disruptors?’ Client service shouldn’t be a differentiator.

Unfortunately, it still is. Because as we saw with the March Madness period, no matter how great the digital platform was, you wanted to talk to someone and you wanted to make sure that they were available to you. So I think those are the areas. The real differentiation is actually the value beyond banking, in addition to unique financing instruments like venture debt, still, is a fairly specialized vehicle that a lot of banks don’t participate in. And then, in terms of the evolving landscape around of banks, and I think fintechs you were asking about as well, my read is that fintechs will always move radically faster than banks. And it’s just not realistic to think that the best technologists in the world want to work at a bank. They actually want to go build a fintech. They want to raise venture capital. They want to do something that puts the banks out of business. And so, I’m a huge believer that partnership strategy, and in some cases, acquisition strategy is the future for all banks, including HSBC.

YUKI: Thank you very much.

SABOW: Sure.

CHRIS: Hey, David. My name is Chris. I actually worked at SVB and still work at SVB. Been doing it for the last five years. So, thank you, for the leadership. And it was great to actually be under your leadership at SVB. And I’m actually doing fintech partnerships. So great question to queue up. But my question is more for this change in the administration that we’re seeing. How does that impact the innovation economy? Or what are the benefits? And maybe some of the cons, whether it’s with crypto or regulation? I’m just curious to get a read of what your thoughts are about the future.

SABOW: Sure. Well, great to reconnect. And I will just highlight to you that the fact that now we have some stability around the innovation ecosystem with SVB with new market entrants, I think, let’s never go through what we went through together. So I can’t comment on the administration specifically. But from a macro standpoint, what do I think some of the opportunities are? And I’ll start with your last one. Crypto stablecoins, in particular.

One of the biggest challenges we know from our time in innovation banking is, what is the regulatory guideline? What is the right side of the line in order to support these companies? If it’s layer 1 protocol, am I OK? Is a wallet OK? What are the controls I need to put in place to be in the middle of supporting money movement with digital currencies? And because you don’t have that or haven’t historically had that level of visibility, it’s been the smallest, most cowboy-style, undercapitalized banks that become the rails for these business models.

And I don’t think you want to take inherently risky and important technology and relegate that to undercapitalized regional below-the-radar players. And so, what I’m really hoping with David Sacks and the broader group is that we can get some regulatory clarity. I’m a huge believer that stablecoins are going to have huge implications around global money movement. It has big implications for a global player like HSBC. And I’m excited for us to get a little bit more visibility, so we can start supporting some of those companies.

CHRIS: If there’s other areas, too, like regulation. Or maybe the repealing of regulation.

SABOW: Yeah, I mean, I know there’s a lot of hope around that from an M&A standpoint. But I think that remains to be seen. As we know, hope is not a strategy. But it is the first time I think maybe in the history of the U.S. that we’ve had such a proliferation of VC and private equity running the country. I guess we’ll find out if that was a good idea.

[LAUGHTER]

CHRIS: Thank you. Appreciate it.

AUDIENCE MEMBER: Hey. Thank you so much. I really enjoyed the conversation. My question was what are the limits to venture finance growing? What are the factors that are limiting the growth? Because from a founder’s perspective, seems a really good option. But is it from the underwriting side, or is it even from the founder’s perspective that it’s limiting it?

SABOW: Yeah, so it’s actually really linked to what’s happening in the venture capital ecosystem. And so, you never want to—don’t solve an equity problem with a debt return. That would be a bad business model. And so, as we think about the right ratio of debt to equity around a financing round, we tend to look at somewhere in the 20% to 30% range. A lot of that depends on—what is the milestone that you’re hoping to achieve? Is it a revenue number? Is it a customer contract? Is it some development milestone around your technology? So really understanding—what is that milestone? What is the capital position on the other side of it? Those are the ways that we think about it.

We try to make sure we’re totally transparent, too, with founders. If I over-leverage your company, and suddenly, we have a VC that wants to come in and invest in you, but they know that capital is going to go to paying back Dave, then I’ve blocked your access to equity.

And so, we have to make sure that we size our instrument the right way, so that under a variety downside scenarios, I don’t block your ability to raise that next round of capital, to pivot the idea, to recapitalize whatever it is that you need to do. The big problem with the venture market, venture capital market right now, is the total lack of distributions. And I think what did I see a stat that there’s $2.3 trillion of private invested dollars tied up in 750 unicorns.

So you’ve got $4 trillion of private capital that’s unexcited right now. And we have to get some exit events and some distributions in order for the market to keep humming so that founders can still get new equity. And I think that we have to essentially undo the sins of 2020 and 2021 from a valuation standpoint and do exactly what Reddit did. Reddit priced at a 50% discount to their last private valuation. And I don’t know. Now, it’s a $20 billion or $30 billion market cap. So we need some board members to take more medicine like that and get these companies public and drive aftermarket performance.

AUDIENCE: Thank you very much.

AUDIENCE: Hi, David. I’m an undergrad at Haas. And one of my questions is around venture debt. You answered some of the questions that I had around it. But I’m curious about the business model with venture debt and how you said that. You load up leverage onto the company, and they’re not profitable yet, and they don’t have revenue. So, does that make it so that they’re cost of financing increases? And wouldn’t that inherently make it a riskier company? And, on the investor perspective, like you just said, it blocks access to equity—what is the risk and return tradeoff that they have to analyze before taking on that debt from you?

SABOW: Yeah, I mean, it’s a good question. I think there’s a lot of entrepreneurs that don’t ask that question. I think it can block access to equity if you’ve overleveraged a company. So, if I am in a deal discussion, and everyone’s telling me about how they know the technology is going to work, that product market fit is going to work, that the clinical trial is going to be positive, I stop the conversation. I’m like, that’s a great equity discussion. Our job is to say that the trial fails. They lose a customer. The development takes longer. What does our debt look like under that scenario? And so, that’s a lot of understanding valuations, understanding the subsector dynamics, and making sure we rightsize it to that. What was the first part of your question related to this? I want to make sure.

AUDIENCE: I think it was around like when you’re leveraging the company, what is the risk and return from your perspective? What is the return that you’re getting?

SABOW: Cost of capital.

AUDIENCE: Right.

SABOW: I mean, debt should always be cheaper than your equity cost of capital. And especially when yes, the repayment source for this debt is either a sale of the assets or your next round of equity financing. And so, looking at what is the dilution you can prevent based on extending your equity financing by six or 12 months. If you think about your business, and maybe it’s 5x revenue multiple on a software company. In six to 12 months, how much more revenue can you apply against that 5x? What is your dilution savings? And how does that compare against the cost of the debt? My read, especially in the current market, where these deals tend to be anywhere from, call it prime plus 1 to prime plus 4, depending on the size and the structure of the deal, that’s always going to be cheaper than your cost of equity—if it isn’t something horrible has happened.

AUDIENCE: And then, I have another follow-up question around multiples and valuations. So I’m particularly interested in cybersecurity. And I read this statistic where 90% of cybersecurity M&A deals go undisclosed. From your perspective, understanding the value of the company and trying to leverage it, how do you look at the landscape and get information? Because that’s something that I’m also asking, investment bankers and people that are also in the industry for. So, from your perspective, how do you look at that?

SABOW: I mean, what’s interesting about cybersecurity—and we have a group in Tel Aviv. We’ve got about 30 innovation bankers in Tel Aviv. They have a huge proliferation of cybersecurity companies. We have a lot of U.S. investors that are spending time in Israel, which tends to have an incredible reputation around cybersecurity. What we’ve seen is that there can be really capital-efficient businesses there, where instead of, gosh, I think I saw there were 20 companies in the last couple of years that have raised over $2 billion of venture capital. This is the opposite of the cybersecurity model, where you might have $20 million, $30 million, $50 million of equity, where suddenly that $150 million and $200 million exit is awesome. That’s a three- to four-bagger for your fund. That’s a great outcome in venture capital. So, that capital efficiency of cybersecurity is something that we’re huge believers in. We’re not necessarily trying to predict who the acquirer is, or will this technology be better than the next one? We’re relying on venture capitalists that are far smarter than us in those areas. But they’re VCs that we’ve worked with for 10 years. They’re people we know well. They’re people that really—they might have invested in SentinelOne, or CrowdStrike, or some of those other category leaders. And we really kind of rely on their diligence and their investment thesis around that.

AUDIENCE: Thank you so much. Appreciate it.

AUDIENCE: Hi. Thank you for coming. I’m an undergrad studying econ and data science. And I had a question about the types of sectors you invest in. Is there anything you avoid? Like you mentioned biotech, but it’s known for being particularly risky.

SABOW: It’s funny. Biotech is risky. But I also joke that biotech companies are like cockroaches. They’re so hard to kill. They really are. I mean, my favorite story is Medivation, which I’d be shocked if anyone in this room knew about Medivation. They were running clinical trials in Russia around Alzheimer’s. It was a penny stock company. Medivation was sold to Pfizer for $14 billion. It had so many ups and downs and in betweens.

And so, biotech inherently is lots of iterations, lots of, ‘Hey, we missed the clinical endpoint, but we saw a signal with this patient population.’ I’m a huge believer that, actually, whether it’s through AI, more sophisticated diagnostics that will actually start to see better clinical trial enrollment, better stratification of disease that leads to better therapeutic outcomes and faster drug development. So that’s an area that actually I’m super excited about.

I think the areas that are harder for us is areas where there’s regulatory uncertainty. So things like crypto, crypto wallets, areas where we might have exposure to a company, but we don’t know who the end recipient is of their payment. We do not want to be in a headline that inadvertently, we financed either an OFAC, sanctioned entity, or a terrorist organization. And so, those areas that have the most murky regulatory landscape, those are going to be very, very tough for us.

Other than that, I expect our portfolio to largely mirror the distribution of venture capital dollars. So, as we see climate tech, or fintech, or software, our portfolio should reflect the relative weightings of those from a VC dollar deployment standpoint.

AUDIENCE: Thank you.

SABOW: Sure.

AUDIENCE: I have one more question for you if we have a second.

SABOW: Sure.

AUDIENCE: In your intro, you mentioned you were an AmeriCorps member at one point. I was also did AmeriCorps for my first job out of undergrad. I’m wondering if you could tell us more about that experience and anything that you’ve taken from that and still think about now?

SABOW: That was maybe one of the better life choices I ever made. I’ll give you a quick answer. But I was interviewing at Accenture, which was Andersen Consulting at the time. I’m showing my age. And I remember my last interview in San Francisco. This poor human was exhausted, and stressed, and looked miserable. And I remember asking him, I’m like, ‘Are you OK?’ And he’s like, ‘Yeah, we do a lot of overtime here at Andersen Consulting.’ And I left that. And I was far less mature than the individuals in this room. And I knew I was not ready to go sell my soul to consulting.

And so, I applied for the Jesuit Volunteer Corps. And I just told myself if I got placed in Alaska, I would go do it. And sure enough, I ended up in Juneau, Alaska. And I, of course, couldn’t escape finance because I ended up running eviction prevention revolving loan program at a homeless shelter. And loved it. And I learned. I met some brilliant, brilliant people. I learned a lot about the circumstances that can lead to poverty and just was exposed to something that I’ve been so blessed not to have to experience that directly. And it gave me just a different appreciation and perspective. The unintended consequence of that is that while I was interviewing for investment banking positions and everything else, I just had a very different story to tell than the typical candidate.

So, I’m like a parent’s worst nightmare when they ask me to talk to their kids around what to do. And I’m like, ‘Take the path less traveled.’ It depends how you’re wired. Some people really like a conveyor belt of predictability. Clearly, I’m wired a little differently. And I like to knock on different doors and see what opportunities might exist. But if you’re that way, definitely encourage to get off the typical path and explore some different parts of the human experience.

AUDIENCE: Thank you. Really appreciate that.

MAS: Well, I think that’s a good way to end today’s discussion. Thank you so much for coming. This has been incredibly informative. And we really appreciate it.

SABOW: Thanks so much for the opportunity.