How important was Silicon Valley Bank (SVB) to the world of startups and venture capital? Very important would be an understatement.
“There are many ways to describe us. ‘Bank’ is just one,” the bank says on its website.
Its significance can also be understood from the range of emotions witnessed after the collapse of Silicon Valley Bank last week.
A bank collapse is often followed by regulators assessing the fallout and depositors looking for ways to recover their deposits. The collapse of Silicon Valley Bank ranged from anxiety, regulatory panic, to voice of support to the failed bank.
These reactions showed the outstretched role of Silicon Valley Bank in the nascent tech industry and its collapse has led to everything from finger pointing to banking practice of startups.
Silicon Valley Bank: What you need to know
Silicon Valley Bank started as a regional bank in California but quickly became the bank of startups and venture capitalists.
Its offering ranged from a standard checking account to VC investments, and loans to currency risk management.
While traditional banking was a core business, SVB also acted as an investor with direct investment in several fund managers and portfolio companies.
It served half of all venture-backed companies in the US and Bloomberg reports that SVB served 44 per cent of the VC-backed technology and healthcare companies that went public last year.
SVB also pioneered venture debt, a type of loan designed specifically for early-stage, high-growth companies with VC backing.
It also played the role of a wealth manager, a financial advisor, and was the top financial services provider to premium wine producers in California.
The Silicon Valley Bank was so intertwined with the startup and VC ecosystem that it essentially became the backbone of the tech industry.
Its meteoric rise is directly proportional to the rise of fast-growing tech startups.
During the pandemic, as startups generated a ton of cash, they all flocked to SVB to deposit their cash.
The bank’s total deposits skyrocketed from just over $60B at the end of first quarter of 2020 to just shy of $200B by the end of the first quarter of 2022.
It was the sixteenth largest bank in the US and was the largest bank by deposits in Silicon Valley.
With its depositors not in need of loan or funding, SVB bought tens of billions of dollars of long-term US treasuries and government-backed mortgage securities.
When the interest rates went up, the market value of these long-duration bonds declined and Silicon Valley Bank started losing money.
To circumvent this loss, SVB tried to shore up its finances but failed, causing a bank run and diminishing its market value.
When SVB ran out of cash, the Federal Deposit Insurance Corp. (FDIC) took over the bank and the US regulators assured it would “fully protect” all the depositors.
While SVB has survived and its UK arm was rescued by HSBC, there are now more questions than ever about the state of startup financing.
“SVB has been an excellent partner and bank for the entire innovation ecosystem, which was illustrated by the enormous support and rallying by the community during the past few days,” says Richard Anton, co-founder and general partner of later-stage VC investor Oxx.
“The bank ended up in a terrible situation because of decisions made by senior management in the US, however, the professionalism shown by the SVB team working under pressure on Friday must be commended,” adds Anton.
Sigh of relief for innovation economy
Before the US regulators announced their decision to make depositors whole, more than 100 VCs and investing firms signed a statement supporting SVB.
Garry Tan, President and CEO of Y Combinator, called the collapse of SVB an “extinction level event” for startups.
Now that it has survived in the US and HSBC has rescued the UK arm of SVB, most investors are breathing a sigh of relief.
Stephen Chandler, Managing Partner of Notion VC, says, “Both the HSBC acquisition in UK and the US Treasury statement supporting depositors there mean the whole innovation economy can breathe a sigh of relief.”
“We had £167M of portfolio company money frozen and 13 companies rated red / high risk of failure this month without help,” he adds.
He believes HSBC has got a steal deal with the acquisition of SVB but would have preferred SVB to remain a single standalone global organisation.
“I hope they build on the capabilities in SVB and continue to provide a service tailored to the tech community. We used to bank with HSBC but moved to SVB in 2012 because they had a far greater understanding of our needs back then,” adds Chandler.
“Had HSBC not stepped in, the impact on the UK startup ecosystem would have been devastating,” says Philip Dutton, founder and CEO of Solidatus.
Jacqueline van den Ende, co-founder of Carbon Equity, sees short term impact of HSBC taking over SVB but feels the European and UK tech ecosystem has lost a “vital ecosystem player” in the long term.
Arjun Jairaj, investor at A/O PropTech, says, “Reputation and talent are immeasurably important to any startup, and the UK government and HSBC’s decisive action ensured that founders did not have to withhold payroll or default on vendor payments.”
Impact of SVB’s collapse on European startup ecosystem
Rinke Zonneveld, CEO of Invest-NL, posted on LinkedIn that SVB was planning to set up a European fund and do more venture debt in the Netherlands and Europe.
“At the moment, we can only hope that the consequences for the global financing of startups and scale-ups will not be too bad,” he wrote in a translated post.
Most investors and startup founders see SVB not launching a European fund due to its failure as a missed opportunity for the European startup ecosystem.
“Obviously a bank with a US mindset can help the EU ecosystem to become more similar like US,” says Willem Poerink, Investment Manager at Shift Invest.
SVB was a major investor in some European countries and the bank had planned to invest more than $500M in technology and life science startups in Ireland by 2024.
In the Netherlands, it was in discussions about how to finance more local companies but Zonneveld adds that “SVB would not have been a game changer.”
The collapse of SVB comes at a time when European startups are struggling to attract early-stage funding, which puts them on the backfoot against their US counterparts.
“While Europe’s tech sector was already struggling with funding shortfalls and widespread job cuts, and it may take time for new relationships to be built and trust established, the European startup ecosystem is resilient and has faced setbacks before,” says Adina Krausz, founding partner and CEO of InnoSource Ventures AG, an independent division of the Swiss multi-family office.
“The European startup ecosystem will be impacted by having reduced options for their banking operations,” says Dutton. “SVB specifically focused their products and services for the underserved startup segment and so were able to disrupt traditional banking.”
While the collapse of SVB is a setback to the European startup ecosystem, not everyone believes its impact will be as huge as it is on the US startup ecosystem.
Jacqueline van den Ende believes that the biggest loss is the operational efficiency offered by SVB to startups.
“SVB’s culture and processes were fully geared towards working with startups. They could open accounts fast – also for non cookie cutter companies, offer competitive rates on venture debt,” she says.
She also adds that SVB played a big role in supporting climate tech companies, both as a financier of small scale solar projects as well as venture debt provider to capital intensive climate technology companies.
“While our entire industry will feel the absence of SVB, who was always a champion for startups at a time when there were few to be found among the financial establishment, the bank’s collapse will not be a major setback for European innovation,” notes Jairaj.
Alberto Chalon, Founding Partner at Giano Capital, does not see the collapse of SVB as a setback for the European startup ecosystem.
He says the European startup ecosystem has a lot of backing at local level and believes SVB would have struggled with its expansion in the post-Brexit world.
Stephen Chandler agrees with Chalon and believes European startups have many routes to raise capital and keep their business intact.
For now, all eyes are on HSBC and how it leverages SVB’s startup-first culture and ability to support early-stage tech companies.
“If they get the playbook right in the UK with solid banking acumen and systems, then there is no reason it can not be spread out through Europe,” says Nenad Marovac, founder, CEO and managing partner of DN Capital.
Zonneveld explains that most banks in Europe are not actively backing startups and banking with traditional banks is an issue for startups because of Know Your Customer (KYC) requirements.
He also adds that venture debt is expensive in Europe and the arrival of a dedicated European fund or a Dutch arm of SVB would have changed that landscape.
Better banking management is needed
In a Sifted Talks episode on Tuesday, Reshma Sohoni, founding partner of early-stage investor Seedcamp, did not hold back when she called VCs responsible for the chaos.
As SVB prepared to shore up its finances, a number of VCs emailed their portfolio companies to move their money out of SVB, which led to the bank running out of cash.
While one can argue that VCs who made SVB the backbone of tech industry funding were also responsible for its collapse and ultimate demise.
However, it is now clear that startups and venture capitals need to learn banking management.
“Better banking management is needed and all banks should be regulated and stress tested frequently,” says Marovac.
Dutton says the SVB saga not only reveals the interconnectedness of our financial system but also the lack of transparency and understanding about that ecosystem.
“The collapse of SVB has highlighted that the line is not drawn correctly and that understanding the interdependencies between customer segments, market conditions, exposure and risk are woefully inadequate,” he says.
He adds, “The thinking that a house of cards can only collapse if the foundation cards collapse will continue to see these types of events occur.”
Stephen Chandler of Notion VC is calling for reassessment of the antiquated models that define the solvency risk of a bank.
He says companies need to diversify their banking relationships while regulators “need to look at better ways to protect depositors.”
For the startup sector, Jacqueline van den Ende says the learning is to diversify banking relationships and focus on having sufficient runway.
“Freak accidents or market shocks like these, however unlikely, can happen – and you want to have a buffer to weather those storms – particularly in the difficult funding market of today,” she says.
Adina Krausz says investors and startup founders should look at counterparty risk when selecting banking partners.
“By prioritising counterparty risk, investors and startups can minimise their exposure to potential financial losses and establish a stronger foothold in the dynamic startup ecosystem,” she says.
Jairaj says, “I believe that the entire ecosystem is coming to terms with lapses in controls and risk management.”
There is still time before we learn the complete picture of failure of Silicon Valley Bank but its rescue by US regulators and HSBC shows the tech ecosystem will not become fragile.
In Europe, the collapse of SVB will leave a gap for a startup-first investor but there is a lot of support in the local ecosystem to keep the clock ticking.
