By Dave Cartwright, CISSP
A week is a long time in most business sectors. In the intertwined world of banking and startups, it feels like an eternity as both sides deal with the fallout from the collapse of Silicon Valley Bank (SVB); the financial crisis impacting a myriad of startups suffering cashflow loss and disruption, with other banks now seemingly in poor shape after experiencing runs. For the technology and cybersecurity startups, not just those in California, that used SVB as their banker or lender (or both), its failure could delay or derail at least part of the next wave of startup-led innovation due to an ability to access finance and cash on deposit, as well as use that money to keep businesses functioning.
The media has been peppered with obituaries of SVB in the past week. Founded in 1983, it trumpeted a celebration of its 20th birthday by shouting about its ranking in the top 160 (out of a total of 8,000) banks in the U.S., its 9,000 clients and the 30,000 companies it had supported over the years. Fast forward to 2023 and SVB had become the 16th largest U.S. bank … right up until everything came crashing down just a few months short of its 40th birthday.
Like many institutions, SVB had taken a hit back in the dot-com bubble days – its stock price halved – but it lived to fight another day due in part to being seemingly well-run and having a quite cautious and restrained appetite for risk. Alongside working with tech startups, it invested a lot in government bonds, a financial instrument considered among the safest investments on offer. By the mid-2010s SVB reckoned to have investments in well over half of the tech start-ups in the U.S., and the share price had been doing well for a while in recent years: from 219 cents in June 2020, it had climbed steadily to 754.84 in Nov 2021, though by the end of 2022 it was back in the low 200s.
How Did This Happen?
What went so massively wrong in March 2023? After all, while COVID-19 was slaying government budgets worldwide, the technology industry was making hay (particularly companies that enabled people to work remotely, collaborate technologically or maintain/improve cyber security). The problem was that SVB had invested heavily in the government bonds mentioned earlier. Words such as “complex” are used to describe how bonds work, but in short: if you invest in something with a fixed income (i.e. interest rate), and interest rates for anything else then jump up, the value of your investment falls like an anvil. With global inflation on the rise and interest rates soaring in an effort to drag inflation back down, those government bonds actually became a problem rather than a safe haven.
Publicly traded companies have some awkward rules: anything they do has to be made public, and when what they have to do is undesirable then the share price falls. SVB told the world that it had to sell its bonds at a loss in order to stay in business, and two days later the Californian regulator announced that “pursuant to California Financial Code section 592, it [had] taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency”.
The Customer Impact of a Banking Collapse
How have businesses been affected? In a recent podcast Arti Raman, Founder and CEO of data encryption start-up Titaniam, said: “there was so much stress piling on over the weekend [immediately after the crash]. And … starting Thursday … a lot of inter-bank transfers, a lot of secondary impacts on four or five other banks as people rushed to get their money out of smaller banks into bigger banks. So, we're not done seeing the impact of SVB by a longshot”.
For the many startups that banked with SVB, in the U.S., the U.K. and further afield, the problems are real. With the parent bank effectively collapsed and under the control of the regulator, it has hit many companies hard. Cash on deposit has been lost. That money may have been revenue, it may have been the proceeds of a funding round, it may have been a loan. In all cases, it means either a hefty hit to the balance sheet or a disruption to cashflow. Some startups have raised concern about their ability to make payroll, others talk about concerns over paying their rent, leases on equipment, license fees for technologies and patents etc.
With over 17,000 cybersecurity startups worldwide, mostly in the U.S. and most with at least some passing business connection with SVB. Cybersecurity is one of the most active sectors for investors, and a significant amount of that investment will have passed through or been deposited with SVB, due to it popularity with many private equity and venture capital players in technology sector. The concern is that financial delay and disruption could result in staff leaving or being laid off due to payroll issues or a need to downsize to conserve cash, product development being delayed or shelved due to a shortage of funds and companies simply shuttering completely due to their money on deposit being lost or tied up in lengthy bureaucracy before anything is refunded by the government. It all adds up to another form of supply chain disruption, only in this case it’s innovation rather than just physical product or components that is at risk.
At this point, we should note that there’s a notable ripple of destabilization in the banking sector at this time beyond SVB. Signature Bank, a New York-based boutique bank folded on March 12, 2023. It faced a similar problem, as SVB’s collapse prompted many of Signature’s customers to withdraw their deposits out of a similar concern over liquidity risk. About 90 percent of Signature’s deposits were not covered by the U.S. government’s guarantee that insures the first $250,000 of deposits, while 85% of SVB deposits were also uninsured. Credit Suisse, one of the world’s biggest banks, has been forced to tap the Swiss central bank this week for $54 billion to shore up its liquidity, while First Republic, a mid-sized U.S. bank is being propped up by other U.S. banking giants to prevent a run on the bank causing another collapse in the market.
What Happens Next?
Now that the dust has settled, the light at the end of the tunnel seems to be getting clearer. In the U.K., HSBC has acquired the U.K. arm of SVB for the princely sum of £1 ($1.21) after it was seized by the regulator to prevent its collapse. In the U.S. a new entity, Silicon Valley Bridge Bank, has risen from the ashes of SVB, stating that “The bank is open for business and new and existing depositors have full access to their money and protection for their deposits”. It means account holders may yet get all their money back, but with the prospect of administrative delays while the new bank gets to grips with the business it is inheriting.
The demise of SVB was a long way short of the financial disasters that befell the world in 2008. It is, however, a stark reminder that things can go very wrong, very quickly. More importantly, it is a thankfully rare example of the potential for disaster when a massive percentage of a particular industry – in this case technology – has its money in one bank.