Silicon Valley Bank’s struggles spell further trouble for beleaguered tech startup market

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  • Silicon Valley Bank, which has long operated in the tech startup world, is in trouble at a time when the funding environment is down.
  • The firm said late on Wednesday that client cash burn has not reduced as expected given the deteriorating market for tech funding.
  • “Psychologically, it’s a blow because everyone realizes how fragile things can be,” said Scott Orn, operating chief of Cruz Consulting, which helps startups with tax, accounting and HR services.

Silicon Valley Bank It has long been considered the lifeblood of tech startups, providing traditional banking services while funding projects and companies considered too risky for traditional lenders. Billions of dollars in venture capital come and go in bank vaults.

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But the 40-year-old firm’s close ties to tech make it especially vulnerable to the industry’s boom-and-bust cycles, and those risks became painfully clear on Thursday.

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Wall Street analysts say SVB financial issues unlikely to spread to other banks

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SVB was forced to conduct a fire sale of its securities, unloading its holdings of $21 billion at a loss of $1.8 billion, while also raising $500 million from venture firm General Atlantic, according to a report. financial update Wednesday late night. After its stock gained 75% in a 2021 market rally, SVB lost two-thirds of its value last year and then plunged 60% during regular trading on Thursday and an additional 22% after the close.

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For the Silicon Valley region, the troubles descended on a particularly difficult time. Venture capital deal activity fell more than 30% last year to $238 billion pitch book, While that’s still a historically high number, the lack of initial public offerings and the continued decline in valuations among once-high fliers suggest there’s more pain to come in 2023.

As a large regulated bank, SVB has been seen as a stabilizing force. But its latest financial maneuvers are setting alarm bells ringing among the firm’s client base.

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“Psychologically, it’s a blow because everyone realizes how fragile things can be,” said Scott Orn, operating chief Cruise ConsultingWhich helps startups with tax, accounting and human resource services.

Orn called SVB the “crown jewel of Silicon Valley” and a “robust franchise” that he hopes to survive this difficult period and potentially get acquired by a larger bank. For their customers, who number in the hundreds, a pullback by SVB would make it more expensive to borrow money.

“Losing a major loan provider in the venture loan market could increase the cost of funds,” said Orn.

According to SVB’s mid-quarter update, one of the primary problems facing the bank is the amount of money being spent by its customers. Net client funds have fallen over the last five quarters as cash burn continues at a rapid pace despite a slowdown in venture investment.

“Client cash burn is ~2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment,” SVB said.

In January, SVB expected average deposits for the first quarter to be $171 billion to $175 billion. This estimate has now come down to $167 billion to $169 billion. SVB estimates that customers will continue to burn cash at essentially the same level as they did in the last quarter of 2022, when the economic crunch was already underway.

In terms of spending, “companies have not adjusted to a slower fundraising environment,” analysts at DA Davidson wrote in a report Thursday. The firm has a neutral rating on the stock and states that “concern about the slow to recover VC environment has kept us cautious on SIVB shares.”

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

Concern has quickly turned to the effects of a possible contagion. Does the bank’s acknowledged bad luck prompt customers to take their money out and put it elsewhere? CEO Greg Baker wrote in a letter to shareholders that the bank has “sufficient liquidity and flexibility to manage our liquidity position.”

“More people in the VC community need to speak up publicly to quell the panic about @SVB_Financial,” said Mark Suster of Upfront Ventures. wrote on Twitter. “I believe their CEO when he says they are solvent and do not violate any banking ratios And The goal was to grow and strengthen the balance sheet.”

Saster funds the types of risk-taking and forward-looking enterprises that rely on SVB for banking services.

For example, in the Case Studies section of the firm’s website, SVB highlights a loan made to a solar panel provider sunrunOffering loans for autonomous construction equipment vendor Manufactured Robotics and financing solutions for ocean drone startup SailDrone.

SVB’s loan losses remain low, meaning that it is not, at least for now, facing the kind of credit challenges the bank faced during the dot-com crash and financial crisis, when charge-offs had increased. Rather, analysts are focusing on the deposit side of the house.

“Given the pressures on their end markets, particularly given the elevated levels of client cash burn, SIVB is witnessing continued physical outflows of client funds,” the Wedbush analysts wrote. Stock rating. The recommendation is based on “a normalization of SIVB growth following an extraordinary 2020-2021 and our belief that the VC market is likely to remain a challenge for the next few quarters.”

Moody’s downgrade specifically pointed to concerns about the bank’s risk profile, pointing out that “the balance of shareholder and creditor interests outweighed above average governance challenges.”

SVB still managed to find reasons for optimism. In a section of its report titled “Continued Underlying Momentum,” the bank noted that private equity and venture capital dry powder inflows hit a record high of $2.6 trillion in January, a sign that there’s plenty of cash out there for startups. Is.

SVB can only hope that it will continue to be a reliable financial source for companies as they eventually seek to deposit a good chunk of that money.

Watch: Why SVB is not the canary in the coal mine for regional banks

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