Startups Fear Existential Threat Following Silicon Valley Bank Collapse

Startups are worried that the Silicon Valley Bank collapse could bring about their own.

That’s according to a report Saturday (March 25) by the Financial Times (FT), which cites interviews with more than a dozen investors and founders.

Silicon Valley Bank’s (SVB) collapse “will have a devastating impact on the ecosystem,” said Alessandro Chesser, CEO of startup Dynasty, which helps people create living trusts.

“Larger companies relying on venture debt are in lots of trouble right now," he added. “Unless things turn around quickly we’re going to see a lot of high value startups going out of business.”

SVB was taken over by the Federal Deposit Insurance Corp. (FDIC) earlier this month following a run on deposits. It was one of the largest banking failures in U.S. history, and an event that continues to shake the financial world.

The FT report notes that it was responsible for about 10% of all venture debt issued this year so far, and behind more than 60% of deals in its home state of California.

Now that SVB is under the control of federal regulators — who are trying to find a buyer — founders are worried that their access to debt will evaporate, the FT said.

“There definitely won’t be the same degree of venture debt available — you can go to [neobank] Mercury and others, but the terms are worse and is that safer?” said Allie Egan, founder of Veracity Selfcare. “It’s sad — the environment is going to drastically change, it’s going to make it harder to innovate."

PYMNTS wrote last week that with the issue of trust in financial institutions moving into the spotlight, it could be a time of reckoning for neobanks.

On one hand, enthusiasm to use digital-only banking options seems to be pretty solid, with research by PYMNTS suggesting consumers would switch banks for better technology capabilities. But that was before the recent banking crisis.

“The FinTechs are going to face a reckoning, as they have been burning through cash (and cash burn, as has been widely reported, forced at least some of the deposit drawdowns that would up sending SVB into a spiral),” PYMNTS wrote.

“For neobanks, the initial flight of capital away from SVB has spurred inflows of deposits at firms like Brex. Startups, after all, have had to find new places to house their money.”