Silicon Valley Bank’s liquidity crisis rocks the tech world

Mar 12, 2023
 

This article was originally published on PitchBook.com on March 9.

Silicon Valley Bank, a financial pillar of the innovation economy, is in a liquidity crisis that has sent shock waves through the startup ecosystem and prompted countless depositors to pull their funds from SVB accounts.

In a sign of the widespread financial stress that has weighed on startups recently, SVB said on March 8 that its clients’ cash burn rates, coupled with declining VC investment, have resulted in shrinking deposits.

The bank’s crisis underscores the extent of the turmoil spreading throughout the venture ecosystem, and raises questions about the ability of many startups to ride out the current economic downturn if they’re unable to get their money back from SVB.

To manage the cash crunch, the bank’s publicly traded parent, SVB Financial, has sold fixed-income investments worth $21 billion at a roughly $1.8 billion after-tax loss and is now seeking to raise new capital through a share sale.

The alarming developments have sent investors and startups scrambling.

Some VCs have urged calm, warning that panicked withdrawals would compound the bank’s problems. Others have advised startups to withdraw funds above the federally insured limit of $250,000.

Many customers were unable to withdraw funds on Thursday after SVB’s online banking system apparently crashed or froze during the turmoil. It wasn’t immediately clear how many account holders had pulled out money prior to the outage, but there were widespread reports of customers doing just that.

The bank expressed confidence that it would weather the storm: “We are experienced at navigating market cycles and are well positioned to serve our clients through market volatility, with a high-quality, liquid balance sheet and strong capital ratios,” SVB Financial CEO Greg Becker wrote in a letter to investors.

SVB did not respond to requests for comment.

“SVB has been a key partner to not just us but the entire tech ecosystem through many volatile times,” said Yash Patel, general partner at Telstra Ventures. Patel added that his firm is waiting to understand the situation before advising startups on how to proceed.

“Every one of our investors is telling me that their companies are pulling capital out,” said Quincy Lee, founder and CEO of Electric Era, a startup that builds electric vehicle charging stations. Lee has been locked out of his SVB corporate account since Thursday afternoon.

SVB Financial said Wednesday that it is planning a $2.25 billion stock sale to restructure its balance sheet. The sale includes an offering of $1.25 billion of its common shares and a $500 million mandatory convertible sale. Growth equity investor General Atlantic has committed to purchase $500 million worth of SVB stock in a private placement.

On Wall Street, SVB’s share price closed down more than 60% on Thursday as investors reacted to the fast-moving drama.

“Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios,” Morningstar analyst Eric Compton wrote in a note.

Cash burn by the bank’s clients has accelerated faster than initially estimated, resulting in a larger-than-expected reduction in its deposit level, according to Becker. He said SVB has leaned toward “more, higher-cost deposits and short-term borrowings” to meet its funding needs.

“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses,” Becker said in the letter. Becker reportedly urged SVB clients to “stay calm” on a call Thursday.

Moody’s downgraded the credit ratings of SVB Financial, saying it doesn’t anticipate the market environment will recover enough for SVB to “materially improve its profitability, funding and liquidity.”

The rating agency also warned of a potential liquidity risk. SVB booked unrealized losses of roughly $15 billion on its exposures in held-to-maturity securities at the end of last year.

Founded in 1983, SVB has long been the bank of choice for VC firms and startups. The institution serviced nearly half of all VC-backed tech and life sciences companies last year.

SVB is also a leader in the venture debt market, which has grown substantially in recent years as an alternative to traditional VC funding. The lender’s struggles add another barrier for startups in an already challenging funding environment.

The tech boom that began in 2020 caused a sharp rise in SVB’s stock price, which climbed about 170% between the start of 2020 and the end of 2021. The bank’s subsequent stock market decline tracked the untangling of the broader startup funding world, which took a hit last year amid rising market volatility and a slowdown in VC funding.

SVB has endured other crises before—following the dot-com bubble that popped in 2000, SVB’s stock fell by more than half, and it saw even steeper declines in the wake of the great financial crisis—but the speed of this week’s developments is unprecedented.

Becker sees the bank’s health returning when the current era of volatility subsides.

“Our conversations with clients give us confidence that activity will accelerate when entrepreneurs reset expectations on valuations, cash burn normalizes, and the public markets and interest rates both stabilize,” he wrote. “At that point—when we see a return to balance between venture investment and cash burn—we will be well positioned to accelerate growth and profitability.”

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