We examine Silicon Valley Bank’s collapse and its effects on venture capital and the banking industry.
Key points
- SVB was a large issuer of venture debt, and its dissolution may result in the drying up of venture capital-ecosystem lending.
- We believe the collapse of SVB could lead banks, particularly smaller US regional banks, to assign greater importance to balance-sheet and liquidity management.
- SVB’s reputation as a key player within technology and health care could mean its collapse may lead to decreased investor confidence in these industries, possibly resulting in decreased demand for IPOs in these sectors.
Silicon Valley Bank (SVB) was once a prominent player in the start-up ecosystem, providing banking services and funding to primarily early stage companies. However, SVB’s recent collapse has left many considering the future of start-ups and the banking industry.
A new owner for SVB: Uncertainty ahead
Recently, First Citizens Bank acquired two of SVB’s four divisions: SVB Bank (the global commercial banking business) and SVB Private (the private banking portion of the company). This acquisition included SVB’s 17 US branches and core operations, and its wealth-management division. Approximately $90 billion of other bank assets were excluded from the acquisition and remain under the US Federal Deposit Insurance Corporation’s (FDIC) receivership, including SVB Securities (the investment banking segment of the business) and SVB Capital (the venture-capital component of the bank), as well as other foreign assets.[1]
While the purchase of these divisions of SVB can be viewed positively, SVB was constructed with a specific risk-tolerance level that was broadly considered to be heightened compared to peers. It remains to be seen how, and if, First Citizens will adapt its present culture, risk-tolerance and compensation structure to this new acquisition. More specifically, how will First Citizens gain comfort with the type of loans that SVB has historically made, and could it decline to provide the same amount of lending capacity in the future?
While these questions persist, it appears that First Citizens has an appetite for this legacy business, and the addition of SVB’s capabilities and relationships could result in a continued capacity to engage with high-growth start-up companies. Ultimately, these added capabilities could lead to more funding for venture-capital ecosystems across major US hubs, including California, Boston and New York City. Furthermore, Frank Holding Jr., the CEO of First Citizens, believes that this acquisition should enhance its technology business, as the bank has not historically cultivated digital innovation economy expertise.[2]
The impact on lending to the venture-capital ecosystem
The potential repercussions of SVB’s collapse extend beyond the organisation itself. For example, SVB was a large issuer of venture debt, and its dissolution may result in the drying up of venture capital-ecosystem lending. This type of financing is frequently provided to early stage, fast-growing companies that are not yet profitable.[3] Several private companies have stated that SVB loaned funds to either bridge them to the next round of financing or provide cash when others were not willing to invest.
Additionally, start-up companies that previously relied on SVB as their primary banking partner may now struggle to make payroll and other expenses as they open bank accounts with different banks. To mitigate these concerns, some venture capitalists have advised their portfolio companies to move their funds to a top-four bank, focus on payroll, and avoid signing agreements that mandate a single-banking relationship.
Other casualties of SVB’s collapse could be focused in sectors where SVB primarily lent funds, including early stage venture companies within technology and health care.[4] Life-science and biotechnology companies could be in a particularly vulnerable state as they often rely on cash reserves to fund drug development. These industries are known for their high failure rates, intellectual-property risks and highly regulated nature, resulting in lengthy and expensive development processes.[5] While the funding environment for venture capital was already challenging prior to the collapse of SVB, it is possible that these sectors could experience the greatest impact.
Roughly two-thirds of SVB’s lending was deployed to venture funds for items such as revolving lines of credit to smooth out capital calls. First Citizens may find this piece of the business easiest to maintain given its comparatively superior credit profile, as it is backed by the capital commitments of the limited partners to these funds. However, it is also more vulnerable to competitor banks that appreciate its solid business profile and low levels of credit losses.
Despite the knowledge and established relationships of former SVB founders and management members, many believe it is unlikely they will attempt to create a new bank in the near future, especially considering regulatory hurdles. The FDIC’s 45-day lockup period following asset acquisitions would impede such efforts for former SVB Bank and SVB Private employees.[6] However, the conclusion of this short lockup would allow them to establish a new entity or find alternate employment and recreate facets of SVB.
The banking industry’s focus on risk management and stability
We believe the collapse of SVB could lead banks, particularly smaller regional banks, to assign greater importance to balance-sheet and liquidity management. This practice could result in increased competition for deposits and a rise in the overall level of funding and liquidity on bank balance sheets. Assuming all else is constant, the outcomes would be likely to result in lower net interest income, lower margins and overall less-profitable institutions. Ultimately, this shift in the banking industry could lead to a greater emphasis on risk management and stability.
While a decrease in banking-sector profitability could lead to a reduction in the availability of credit for start-up companies, a greater emphasis on risk management and stability in the banking industry could lead to greater reliability, which would benefit start-up companies seeking capital. This could also increase the willingness of start-up companies to share financial data and information to ensure they attract the right partners.[7]
Impact on the IPO market
The collapse of SVB has the potential to shape the initial public offering (IPO) market in several ways, affecting both companies that have recently gone public and those planning to do so in the near future. Recent IPOs are facing increased scrutiny in the aftermath of SVB’s collapse, as many had relied on the bank for financing and are now searching for alternative lenders.
For private companies, the fallout from SVB’s collapse could mean that smaller and under-the-radar companies may struggle to secure new banking partners. Factors such as negative cash flow could make these companies less-desirable candidates for financing, leaving them with fewer options for funding their growth and thus making it more challenging to reach a stage where they are ready to go public, further slowing down the IPO market. SVB’s reputation as a key player within technology and health care could mean its collapse may lead to decreased investor confidence in these industries, possibly resulting in decreased demand for IPOs there.
Many private companies have sought to extend their runway by taking on venture debt, rather than raising equity at a decreased valuation. Conversely, some companies may be forced to raise a ‘down round’ or become public sooner than they would have otherwise owing to a need for capital, resulting in an increase in IPO volume. However, it is likely that many of these companies would have to accept lower valuations amid the broader market downturn.
The ripple effects of SVB’s collapse
Given its once prominent role in the start-up ecosystem, the collapse of SVB could potentially have far-reaching implications for the venture-capital industry and the broader banking sector. While it remains unclear how the two divisions of SVB will integrate with First Citizens, the effects of dwindling venture-capital credit could affect the industries that typically received funding from SVB amid an already challenging funding environment. First Citizens appears committed to the venture-capital community, with plans to leverage SVB’s strengths in specific industries. Ideally, the unfortunate failure of SVB will encourage a more stringent risk-management framework, greater stability in the banking industry and an increase in liquidity on balance sheets, as well as improved transparency surrounding the financial information of start-up companies, benefiting all stakeholders of the ecosystem.
[1] FDIC. March 26, 2023. https://www.fdic.gov/news/press-releases/2023/pr23023.html
[2] Axios. March 27, 2023. https://www.axios.com/local/raleigh/2023/03/27/raleighs-first-citizens-buys-tech-influence-with-svb
[3] Fast Company. March 19, 2023. https://www.fastcompany.com/90866801/what-is-venture-debt-svb-collapse
[4] SVB Q4 2022 Financial Highlights. January 19, 2023. https://s201.q4cdn.com/589201576/files/doc_financials/2022/q4/Q4_2022_IR_Presentation_vFINAL.pdf
[5] Crunchbase News. March 10, 2023. https://news.crunchbase.com/health-wellness-biotech/silicon-valley-bank-investments/
[6] Bloomberg. March 28, 2023. https://www.bloomberg.com/news/articles/2023-03-28/moelis-hires-team-of-senior-svb-securities-technology-bankers#xj4y7vzkg
[7] Fortune. March 21, 2023. https://fortune.com/2023/03/21/svb-collapse-could-impact-startup-funding/
Authors
Meghan Bruni
Investment strategist
Thomas Karthaus
Research analyst, private markets, Specialist Research team
Michael Holton
Head of interest sensitive/stable pod
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice.
