Silicon Valley Bank’s woes signal more problems for the startup market

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Bank of Silicon Valley has long been seen as the lifeblood of tech startups, providing traditional banking services while funding projects and ventures deemed too risky for traditional lenders. Billions of dollars of venture capital flow in and out of bank vaults.

But the 40-year-old company’s intimate ties to technology make it particularly susceptible to boom-and-bust cycles in the industry, and on Thursday those risks became abundantly clear.

SVB was forced to fire sell its securities, offloading $21 billion of its holdings with a loss of $1.8 billion, while raising $500 million from venture capital firm General Atlantic, according to a report. financial update Wednesday evening. After its stock soared 75% during the 2021 stock market rally, SVB lost two-thirds of its value last year, then fell another 60% in regular trading on Thursday and another 22% after the close. .

For the Silicon Valley region, the troubles land at a particularly difficult time. Venture capital deal activity fell more than 30% last year to $238 billion, according to PitchBook. While still a historically high number, the lack of initial public offerings and the continued decline in valuations among the top brass suggest there is much more pain to come in 2023.

Signage for the high-tech commercial bank Silicon Valley Bank, on Sand Hill Road in the Silicon Valley town of Menlo Park, California, August 25, 2016.

Smith collection | gado | Stock Photos | Getty Images

As a large regulated bank, the SVB is seen as a stabilizing force. But his latest financial maneuvers are ringing the alarm with the firm’s clientele.

“Psychologically, it’s a blow because everyone realizes how fragile things can be,” said Scott Orn, chief operating officer at Kruze Consulting, which helps startups with tax, accounting and of human resources.

Orn called SVB “the jewel in the crown of Silicon Valley” and a “strong franchise” that he hopes to survive this tough time and even potentially be bought out by a bigger bank. For his customers, who number in the hundreds, a withdrawal from SVB would likely make it more expensive to borrow money.

“The loss of a major debt provider in the subprime debt market could drive up the cost of funds,” Orn said.

According to SVB’s mid-quarter update, one of the main issues facing the bank is related to the amount of money its customers are spending. Total client funds have fallen over the past five quarters as cash burn has continued at a rapid pace despite slowing venture capital investment.

“Client cash burn remains around 2x pre-2021 levels and has not adapted to the slower fundraising environment,” SVB said.

In January, SVB expected average deposits for the first quarter to be between $171 billion and $175 billion. That forecast has now dropped to $167 billion to $169 billion. SVB expects customers to continue to burn cash at essentially the same level as in the last quarter of 2022, when the economic tightening was already well underway.

Analysts at DA Davidson wrote in a report Thursday that in terms of spending, “companies have not adapted to the slowdown in fundraising.” The company has a neutral rating on the stock and said concerns “about a slow-to-recover venture capital environment have caused us to remain cautious on SIVB shares.”

S&P downgraded its rating on SVB to BBB- from BBB, leaving it just a notch above its junk rating. On Wednesday, Moody’s downgraded SVB from A3 to Baa1, reflecting “the bank’s deteriorating funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet.”

Concern quickly turned to the potential contagion effect. Do the acknowledged misfortunes of the bank lead customers to withdraw their money and put it elsewhere? That question circulated among investors and tech executives on Thursday, even after CEO Greg Becker wrote in a letter to shareholders that the bank has “sufficient liquidity and flexibility to manage our liquidity position.”

“More members of the VC community need to speak out publicly to quell the panic over @SVB_Financial,” Mark Suster of Upfront Ventures writing on Twitter. “I believe their CEO when he says they are solvent and they don’t violate any bank ratios & the goal was to grow and strengthen the balance sheet.”

Suster finances the types of risky, forward-looking businesses that rely on SVB for banking services.

In the case studies section of the company’s website, for example, SVB highlights a loan to a solar panel supplier sunrundebt deals to self-driving construction equipment provider Built Robotics and financing solutions for ocean drone startup Saildrone.

SVB’s loan losses remain low, meaning that at least for now it is not facing the kind of credit problems the bank faced during the dot-com crash and financial crisis. , when radiation soared. Analysts are instead focusing on the deposit side of the house.

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“Given the pressure in their end markets, particularly high levels of customer cash burn, SIVB sees continued large outflows of customer cash, both on and off balance sheet,” analysts at Wedbush, which have the equivalent of a holdback. stock note. This recommendation is “based on the normalization of SIVB’s growth after an exceptional 2020-2021 year and on our belief that the venture capital market could remain difficult over the next two quarters”.

Moody’s downgrade specifically highlighted concerns about the bank’s risk profile, noting that “the balance of shareholder and creditor interests posed higher than average governance challenges.”

SVB still managed to find reasons to be optimistic. In a section of its report titled “Continued Underlying Momentum,” the bank noted that private equity and venture capital hit a record high in January at $2.6 trillion, indicating that there is there is a lot of money available for startups.

SVB can only hope it remains a trusted financial source for companies looking to store a good chunk of that cash.

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