The collapse of the Silicon Valley Bank and its effect on Tech Start-Ups

by Matilde Serena

Silicon Valley Bank (SVB), founded in 1983 to provide banking services to tech startups, experienced a catastrophic collapse in March 2023. The collapse was due to SVB's focus on risky long-term investments, lack of diversification, and insufficient deposit insurance coverage. The collapse has shaken the tech industry, with potential solutions for startups to shift their banking towards big banks and EU regulators monitoring the situation. This post, therefore, touches upon a variety of themes such as law, economics and technology. By adopting an interdisciplinary approach, this post explains (1) background information on the Silicon Valley Bank, (2) the reason for its collapse, and (3) the consequences for Tech Start-Ups and the Tech industry.

What is the Silicon Valley Bank?

SVB was founded by Bill Biggerstaff and Robert Medearis in 1983 (allegedly after a poker game between the two) with the purpose of providing banking services to tech startups in Silicon Valley. In 1987, the company went public, entering Nasdaq i.e. the online global marketplace for securities’ trade and raised more than 6 million in equity. As a consequence of its attempt to back up young tech startups during the 1990s’ dot-com bubble, SVB’s stocks lost half of their market value. In fact, SVB’s success is greatly due to the Californian wine business flourishing in the early 2000s. As of December 2022, SVB controlled 44% of US venture-backed technology and healthcare. What made SVB not “your typical lending institution” is its effort in building relationships with new companies in their early stage of development and its strong bond with many venture capitalists and entrepreneurs. Moreover, SVB held the majority of its accounts with enormous sums of money in deposits, most of which were not insured by the US government. It is interesting to examine how SVB’s singular practices fuelled both its success in the past (especially the 1970s and 1980s) and its collapse in the future as explained in the next section.

Why did it collapse?

At the beginning of March 2023, SVB was subjected to a so-called “all-out bank-run” i.e. an attempt from many of its customers to withdraw their deposits at the same time e.g. upon advice from venture capital firms such as Founders Fund. SVB did not dispose of sufficient reserves to meet everyones’ withdrawal requests and panic started to spread. SVB’s collapse is tied to three fatal flaws.

Firstly, although SVB had invested its customers’ deposits in Treasury bonds i.e. lending to the US government , these had long maturities meaning that they were riskier products. SVB did not balance out the risk of interest rates skyrocketing after the Covid-19 pandemic by diversifying its investments.

Secondly, on the same note, the entirety of SVB’s business focused on the tech sector which was really sensitive to the increase in Treasury bonds’ interest rates. Furthermore, a general slowdown of the tech industry e.g. big-scale layoffs in big tech companies, lack of investors, skepticism from old and new customers led to a decrease in SVB’s revenue.

Thirdly, it is worth mentioning that most of SVB’s customers were not covered by the normal federal deposit insurance, which insures bank’s deposits up to $250,000. This was due to the fact that SVB had more than $4 million in deposits, meaning that less of 10% of them were backed up by the US government. This is rather uncommon: generally, banks have half of their deposits secured by the federal insurance.

To sum this up in a timeline:

• On 9 March, SVB’s shares prices started to tank and the bank announced the attempt to raise additional capital by selling stocks. This did not reverse the catastrophic market trend as venture firms and rating agencies advised portfolio companies to withdraw their deposits from SVB.

• On 10 March, the US regulators shut down SVB and took over the management of the bank’s deposits.

SVB’s situation remained precarious until 13 March, when HSBC UK (part of the largest banking and financial services institution, the HSBC Group) acquired it for a symbolic price of £1.

Consequences for Tech Start-Ups and the Tech industry

The US government has promptly taken action to secure customers’ deposits and avoid panic. As of today, investors still fear the comeback of a 2008-like financial crisis. Although this is definitely not the case according to President Biden’s declaration “Americans can rest assured that our banking system is safe. Your deposits are safe.”SVB's collapse has profoundly shaken the Tech industry. In particular, there might be issues for startups to access their funds and credit lines to pay their employees; as a result, some might also collapse.A possible solution to withstand challenges and ensure business continuity would be diversification of their banking i.e. startups should shift away from middle-sized banking institutions and keep the majority of their deposits with big banks, which will most likely acquire the monopoly in startups’ financing.EU regulators had been monitoring SVB’s collapse, and the European SVB’s branches claim to have a degree of independence (in terms of balance sheets and management) high enough to withstand the crisis.Due to the limited business presence of SVB and its subsidiaries within Europe, the impact on the EU seems rather limited.

To conclude, SVB's collapse serves as a reminder of the importance of risk management and diversification in the banking industry. It also highlights the potential impact of a bank's failure on the wider economy and the need for strong regulatory measures to ensure the safety of depositors' funds.

Sources:

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<https://techcrunch.com/2023/03/13/in-historic-last-minute-deal-hsbc-acquires-silicon-valley-bank-uk-says-all-depositors-money-is-safe/> accessed 27 March 2023.

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