The far-reaching consequences of SVB's collapse

Mar 20, 2023
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Even as the dust settles, ominous concerns and unknowns remain about where we go from here.

The collapse of Silicon Valley Bank couldn't have come at a worse time for startups. 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.

SVB's collapse is sure to irrevocably change the inner workings of the VC industry. The blowup has left a gaping hole in the venture capital ecosystem and triggered a mass migration to alternative financial partners. Eventually, we will see a new version of SVB emerge—albeit under the auspices of new management that will likely have different priorities, and perhaps different values, than its predecessor.

And the consequences will be far-reaching for the venture industry.

SVB has been an essential cog in the VC market since 1983—long before companies like AmazonGoogle and PayPal became household names.

Michael Moritz of Sequoia compared the bank's collapse to a "death in the family." As the go-to lender for tech startups, SVB offered a suite of services and products for founders and their backers.

Silicon Valley is full of stories from founders and investors about how SVB put its faith in their startups when no one else would. It was a lender that uniquely understood the high-risk, high-return nature of the asset class and, as a result, was willing and able to make bets that others didn't understand, or value.

SVB was nimble and innovative in a landscape where traditional banks had been fusty and slow-moving. Besides its expansive commercial banking business, SVB has been a leading provider of venture debt, offering products such as revolving credit facilities for early-stage companies and subscription lines that helped VCs bridge the gap between drawdown and investment, so they could move quickly on investment rounds.

Now stabilized by a government-led backstop, SVB is open for business, known for the time being as the Silicon Valley Bridge Bank under the control of the Federal Deposit Insurance Corp. The FDIC has yet to find a new buyer. JPMorgan Chase and Bank of America have reportedly passed on the option to purchase the failed bank.

Multinational bank HSBC opportunistically snapped up SVB's UK unit for the nominal sum of £1 after just five hours of due diligence. HSBC, a Hong Kong- and London-listed lender, is poised to take over a balance sheet of £8.8 billion (about $10.7 billion) and around $6.7 billion in deposits—tiny for a bank with $3 trillion in assets.

The concern is that any potential new owner, particularly a large, established bank, may not have the skill set, the inclination or even the risk appetite to cater to the specific needs of SVB's startup clientele.

It isn't a foregone conclusion that SVB Financial, the bank's holding company, will itself find a new owner. Apollo Global Management, Ares, Blackstone, The Carlyle Group and KKR have all reportedly started due diligence on SVB's $74 billion loan book. Given the largely unprecedented nature of the deal, it is hard to say how PE investors would compare with traditional banks as custodians of SVB's main business.

Even if some semblance of the old SVB emerges from the wreckage, it seems likely that a different (read: adverse) regulatory environment is awaiting the successor bank not far down the road.

The rules that allowed SVB to carry on the way it did—exposing itself and its depositors to unreasonable risk—are already coming under political attack. Sen. Elizabeth Warren, a former presidential candidate, and Rep. Katie Porter, who is running for Senate, have proposed a bill to repeal a 2018 law that weakened the landmark Dodd-Frank regulations passed in the wake of the 2008 financial crisis.

The SVB brand has been a fixture on the scene through many economic cycles, enjoying a reputation and standing that took decades to establish. But once that stature has been lost, it could take many years for it to be restored, or replaced.

SVB: It's not 2008 all over again
Mike Coop, chief investment officer EMEA, Morningstar Investment Management, says that major banks are in much better shape than Silicon Valley Bank.

Silicon Valley Bank’s liquidity crisis rocks the tech world
Cash burn by the bank’s clients has accelerated faster than initially estimated, resulting in a larger-than-expected reduction in its deposit level. SVB has leaned toward “more, higher-cost deposits and short-term borrowings” to meet its funding needs.

What is an Asset-Liability mismatch?
Silicon Valley Bank's failure is the second largest bank failure in U.S. history, Washington Mutual being the largest in 2008. The catastrophe was not driven by credit problems but mismatch of assets and liabilities.
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