Silicon Valley Bank’s Existential Crisis Will Force Reckoning for Venture Capital
Small banks.
Big Impact.
The demise this past week of crypto-bank Silvergate and the lingering issues at SVB Financial (Silicon Valley Bank) will likely have far-reaching reverberations for lending — specifically to the tech sector.
The specter of bank runs looms and may force smaller, less-well-capitalized companies, the bedrock of innovation, to seek alternative ways to keep going.
For SVB — and startup funding — a major shoe has dropped.
At this writing, reports are coming from the likes of CNBC that SVB is in talks to sell itself, and a plan announced this week to raise billions of dollars in capital has failed. Trading in its shares has halted.
Spiraling Liquidity Concerns
Concerns over SVB liquidity naturally beget concerns over liquidity elsewhere. The reports that mention the failure of the SVB share sale also mention that as-yet-unnamed larger banks are mulling a buyout of the bank. But jitters over contagion are hitting marquee banking names on the Street (their shares were down mid-single digit percentages Thursday).
As hedge fund titan Bill Ackman mused in a series of tweets: “The failure of SVB Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.”
The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.
— Bill Ackman (@BillAckman) March 10, 2023
The scramble’s only going to intensify — and we note that when people start talking “bailout,” the echoes of the 2008 crisis grow louder.
As we reported Thursday evening, the problems are mounting at SVB (and had done in Silvergate), as a continued outflow of deposits had forced bond sales. Those bonds were sold at a steep loss as interest rates rose. The deposits? Well, they were, and are, being withdrawn by the startups and their VC bankers that, in turn, had been hit by the rising costs of doing business.
The Vicious Cycle
As these firms yank their capital and park it elsewhere (i.e., at other banks), the cycle becomes ever more vicious: Liquidity concerns spread to the giants like J.P. Morgan and others.
And it’s almost a sure bet that the VCs will freeze their intent to fund new ventures or continue sending cash to existing portfolio companies until their own financial standings are more assured.
Panic has a way of feeding on itself. TechCrunch reported Thursday night that some (unnamed) SVB customers “are struggling to transfer funds out of their bank accounts,” as they encounter tech glitches on the bank’s website and client support services.
No matter how the dust settles — a bailout, a fire sale of SVB to other banks — venture capital will feel a long-term impact. The cash burn that the startups have been facing will force VCs to examine whether FinTech and tech firm valuations have been too high. After all, the VCs depend on returns on their investments and attracting new backing to keep their activities afloat.
A chilling effect on investments would force the startups to seek new ways to keep their efforts and operations ongoing, which may spark deal-making in the form of mergers and acquisitions or outright sales.
Bank runs are never pretty — what’s unknown, at least at the moment, is just how far the fallout will spread.