The 40y.o. bank is the most critical financial institution for the nascent tech scene, serving almost 50% of the U.S. tech startups, listed or not. SVB is also an investor in many tech startups either directly through its corporate VC or by being an LP in some of the biggest VCs across the globe including Sequoia, Accel, Kleiner Perkins and many more…
At the same time, its commercial products are limited to venture debt, credit card issuance and payment providing to startups – all these with extremely low fees and interest rates. All these in combination with the financial markets shrinkage, the falling startup valuations and the extremely difficult fundraising environment during the last 12 months, which all together had as result its client portfolio pressure, led to the condensation of its assets. During the last weeks, this waterfall resulted in rumors which were unfortunately confirmed last week when Moody’s announced its intention to downgrade the bank. That led the bank’s customers to massive capital transfers to other banks and withdrawals to the point where the bank had to sell critical assets off, including mortgage bonds, to cover its claims against its customers.
(Note: The by default US federal government assurance of $250K is a very low amount considering that the bank’s main clients are fast-growing technology companies. This results to a non-insured 93% of the banks total assets.)
It is indicative that this week many VCs including Peter Thiel’s Founders’ Fund invited their portfolio companies being SVB’s customers to claim their assets back as soon as possible. This combined with the recent FTX crash scared customers who ran to withdraw their deposits. And this is one of the simplest ways a bank goes bankrupt; they ran out of cash.
As a last attempt to raise money, the bank tried a new capital increase which ended up with the SVB stock price 60% down last Friday, a historically low record that forced the federal regulatory authorities to get it out of trade.
And although the bank successfully raised $500M from General Atlantic, it seems that this was not enough and now we’re facing the biggest bank collapse within the last 15 years.
And now what?
- Given that SVB works with more than half of all U.S.-based startups and is the preeminent provider of venture debt, its collapse leaves an open gap among startups regarding cash flow and access to banking products.
- The international startup scene goes numb for the third time in three years; COVID-19 and Russian invasion to Ukraine being the previous two. And is this the tip of the iceberg or what?
- Experts are afraid of a domino effect also among EU banks, especially those which have similar portfolio composition.
The #bad news
- SVB was financing cash flow negative startups with venture debt products; startups that won’t be able to raise money elsewise and may be forced to go bankrupt.
- Venture debt may be vanished. According to data pulled from Crunchbase, the bank participated in 75 founding rounds last year, mainly involving venture debt, that totaled $5.7 billion.
- Big difficulty of businesses who can’t wait even 1 or 2 weeks to cover payroll and other operational costs (especially when many U.S. companies have a 15-day payroll schedule) may lead to layoffs.
- U.S. startups will also face difficulties in equity fundraising, as SVB was both an equity investor among many of them and a limited partner across many VCs.
- International rounds, especially Series A or later, will be significantly affected, as VCs will focus more on sustaining their portfolio rather than expanding it.
- Valuations will definitely go down and this will affect not only startup funding rounds, but also MnAs.
- Investors distrust in the tech startup ecosystem may lead to further recession and the sudden death of many tech companies or even the loss of potential products.
The #good news
- So far, other banks do not seem to be significantly affected. U.S. Federal Reserve Bank affirms that stress tests do not show high risk factors. The same comes from the ECB side.
- Fintechs are driving crazy as many deposits were transferred to them especially due to easiness. This will create a new positive push towards this sector.
- Systemic banks are on the same track; JP Morgan’s stock price went 2.5% up in Friday’s trading as a significant bunch of startups tended to trust more traditional financial institutions.
Anyway, it’s still quite early to express any strong view on the matter. And the fact is that many traditional banks including JP Morgan, Citi and others would have interest in acquiring Silicon Valley Bank, so time will show…
Just to close with, as of Saturday afternoon in San Francisco, about 125 venture firms including Sequoia Capital had signed on to a statement supporting the SVB and spearheaded by venture firm General Catalyst.
Also on Saturday, the startup incubator Y Combinator posted a petition signed by hundreds of founders and chief executives asking for “relief and attention to an immediate critical impact on small businesses, startups, and their employees who are depositors at the bank.” The petition asked for small businesses that had deposited funds at Silicon Valley Bank to be made whole, and for Congress to “restore stronger regulatory oversight and capital requirements for regional banks.”
So let’s wait. The next days are critical.