Uncertainty. Panic. Urgent.
Three words which those keeping up with the failure of Silicon Valley Bank have heard a considerable amount over the past few days. As the SVB collapse unfolded in a catastrophic 48-hour period last week, businesses were left deeply uncertain about the future.
SVB was not only the bank of around 50% of tech and life sciences start-ups in the US, but a lender to many VC-backed companies as well as the short-term financing provider to venture and private equity funds through capital call lines of credit, among other products.
The collapse of the bank could not have come at a worse time for startups. According to Pitchbook, venture-backed companies were already facing a capital crunch after market volatility forced investors to slow dealmaking and set higher benchmarks for financing, and now startups' debt financing options have also taken a hit.
Other banks are stepping up, but no matter how quickly they may be able to stem the fallout, SVB's collapse is sure to change the inner workings of the VC industry.
SVB depositors will get their money back
There has been a substantial amount speculation has been made over the past couple of days regarding where SVB’s assets will end up. On Sunday, the US government stepped in to protect the bank’s customers’ funds in a bid to prevent contagion from spreading across the financial services sector. The response has been hailed as a “saving grace for start-ups" and solved a litany of immediate problems.
For UK businesses, the answer unfolded on Monday, with the news breaking that the UK government has facilitated the sale of the UK subsidiary of the bank, with around 3,000 customers, to HSBC for £1. The government had to move quickly on this with the Spring Statement due Wednesday 15 March, as the optics of a key bank, which services the thriving start-up culture in the UK, collapsing were terrible.
It is without doubt that other banks will assume the banking role for the venture market, and the business will be spread across many banks."
Could a challenger bank fill the void?
The main high street banks tend not to be supportive of start-ups as they are perceived as higher risks. However, the sale to HSBC does raise some questions, as many startups and venture businesses used SVB because they were better to deal with those big banks. This begs the question, will the start-ups affected want to stick with HSBC?
Sentiment in the start-up community is mixed, some founders are prepared to take “a wait and see” approach while others have or are preparing to move funds to traditional banks. It is without doubt that other banks will assume the banking role for the venture market, and the business will be spread across many banks.
The void left by SVB in the market will close at some point. Ultimately, the market for early-stage lending will be covered by other lenders. The $5.5 billion in investor-dependent loans (early-stage lending) SVB had been large, but it is a drop in the bucket of the total capital that makes it to VC-backed startups on a yearly basis.
What was the role of venture capital in the crisis?
The Washington Post has authored an article analysing the role of venture capital played in the crisis. The core question which has arisen commentators is: why did some funds not tell their portfolio companies to diversify from SVB? When founders go to venture capital, they are not only seeking funds, but also, advice- not dissimilar to management consulting firms. SVB had been on the radar as being a risk since November 2022.
SVB was undone by short sellers who had been gradually pushing up their bearish interest in bank stocks, betting that the Federal Reserve’s rate hikes were not good news for financial institutions. Thus, if SVB was forced to sell its securities holdings, it would have incurred a $15.9 billion loss, wiping out its entire tangible common equity.
To compound this, the client base was too concentrated. If venture capital funding suddenly dried up or there was a bank run, clients would withdraw their money. With this kind of profile, why did some venture capital funds allow their portfolios to deposit all their cash with one bank.
The Washington Post concludes that “SVB’s collapse and its rippling effect in the start-up world is a sign that VC funds have lost their discipline. With so much money flooding into their world, they stopped managing known risks. They became simple pass-throughs, shovelling money from one end to another.” The collapse of SVB highlights the risk venture capital and private equity owners face. This time they were saved by the US and UK governments, but what happens when the next bank collapses?
The collapse of SVB in the context of 2023
Investment levels stay high on deal-count basis compared to any year outside of 2021, and there is a considerable amount of dry powder. But there is still a significant decline in the market. According to Pitchbook, deal value has declined by two-thirds over the past four quarters. Analysts are forecasting that Q1 2023 is looking to be similarly low in terms of dollars invested as Q4 2022, and there is little sign the IPO market will pick up any time soon to relieve pressure building within the market.
So, what is next?
The collapse of SVB was sudden and the full fall out from this will not be known for a while. However, there are a few key insights which have arisen out of the crisis.
Diversify banking operations
The number of companies exposed to SVB highlights the need for customers to regularly investigate how diversified their operations are to different banking partners via their provider and ensure there are robust systems and risk controls in place.
Crypto as an alternative
In a deeply ironic turn of events, cryptocurrencies have surged by 20% in the past few days. The decentralised nature of cryptocurrency, which is met with deep scepticism by the financial establishment is having a moment in the sun. However, founders should remain cautious bitcoin’s recent surge is no guarantee of anything, let alone long-term viability. The currency is still down about 65% from its all-time high, and its price is still notoriously haywire.
Prepare for interest rates to come down
Make no mistake, what has happened with SVB has been tremendously disruptive to the global markets. Investors have ripped up for forecasts for further interest rate rises and dumped bank stocks around the world.
According to Investment Week, markets now predict a 32.8% chance of no hike from the Fed (US), with a 67.2% chance of a 25bps hike. Markets have been predicting a similar path for the Bank of England, with traders expecting an almost 100% chance of a 25bps rate hike last week, before dipping to about 60% today
Businesses will build out their treasury teams
Start-ups and SMEs are always at financial risks, even without their main banking partner collapsing. Risks range from foreign exchange and interest rate risk to liquidity risk. Treasurers are instrumental in finding and managing these risks and creating shareholder value.
As companies grow, financial risks evolve. Transformational changes such as M&A transactions can give rise to their own treasury risks that must be managed, but also result in the need to update existing treasury management policies and processes.
Marks Sattin is helping several venture capital and private equity funds build out their treasury teams. As the UK’s leading finance and accountancy recruitment consultancy, we are uniquely placed to consult on your business's talent requirements.
To find out more about how we can help you find top treasury talent, please submit a brief, and a member of our team will be in touch.
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