The collapse of SVB and other banks serving Silicon Valley has been shocking and swift. What are the future implications? Should we be worried about this vital sector?
The March 10 collapse of Silicon Valley Bank has dealt a major confidence blow to the startup ecosystem. Banks serving this sector are an integral part of the innovative economic engine. Indeed, half of US venture-backed tech start-ups were SVB clientsi, and the bank worked with some illustrious and popular names in the tech space, including Roblox, Cisco, Pinterest and Airbnb.
Although the Federal Deposit Insurance Corporation (FDIC) took control of SVB’s assets and established a bridge bank to provide former clients with access to all of their money, there is still considerable worry about what this means for tech companies in search of capital. The decline of a bank like SVB, presents some unique challenges for this sector and the economy as a whole.
Startups will need to look elsewhere for loans and resources
The startup sector was already slowing down compared to the pandemic years. Concerns over a potential recession and high (possibly inflated) valuations have been slowing investments in startups. But the SVB collapse was a huge blow. The $300 billion of venture capital waiting to be invested may be scaled backii, restricting growth at a time when the U.S. economy is expected to grow by a paltry 1.4% this yeariii.
Banks serving the tech industry fulfill a vital financial and economic role. They understand and accommodate the needs of early-stage tech startups, which typically have funding but will show no profits for some time. Traditional banks tend not to provide the types of credit lines or venture debt that are vital to this sector. Tech-centric and VC-focused banks are also deemed important to national security (particularly in economic competitiveness with China), which is another reason the U.S. government decided to secure SVB’s depositors.
As a result of the SVB collapse, there will likely be fewer low-cost loans available to tech startups, necessary for topping up balance sheets and bridging between funding tranches. SVB had other special functions in this ecosystem: organizing events, including introductions to VCs and providing financial advice. There is now a dearth of this convenient, appropriate source of capital and resources. Startups will now have to reassess their financing, revise their business plans and modify their models.
Trust in the banking system may be difficult to rebuild
We are also likely to see a drop in trust in the banking sector, particularly the segment that serves startups. VCs and private equity investors will now be pushing their startups toward larger banks, which are not the same animal. The big banks typically have a diversified retail clientele and are not so familiar with the tech startup world. And tech represents a tiny portion of their business.
Most of the big American banks are based in New York. First Citizens Bank, which acquired SVB’s remaining assets, is a mid-sized, regional bank headquartered in Raleigh, NC. The East Coast represents a world – and a culture – away from the West Coast tech industry.
Although large banks have more capacity for risk, they tend to impose stricter terms and conditions than the ones serving the startup sector. They also are generally less flexible, insisting on guarantees (not taking equity) and they typically do not provide free services such as complimentary 409A valuation reports. It’s also likely that they’ll be stricter on enforcing loan covenants.
We also could see further tightening of banking regulations. Two renowned senators (Elizabeth Warren and Katie Porter) are pushing for a new bill to repeal a 2018 act that rolled back the Dodd-Frank Act that followed the 2008 crisis. This would mean greater stress testing.
In the meantime, tech startups can continue to rely on business partners such as professional business services firms, auditors and lawyers for advice on financial planning, cash and risk management, budgeting and adapting to new requirements and regulations. It may be a more challenging road ahead for startups, but those that perform adequate due diligence and surround themselves with a high level of financial expertise will have a significant advantage in a world without banks like SVB.