- The decline of the Silicon Valley bank is likely to be felt across the technology landscape globally in the coming years.
- Investors who spoke to CNBC said there could be problems for startups trying to access their funding and credit lines to pay workers.
- Startups may also need to tighten their belts, while others may fall due to lack of funding, experts said.
Silicon Valley Bank He was the backbone of many startups and venture capital funds around the world. The effects of its collapse, the biggest banking failure since the 2008 financial crisis, are likely to be felt across the technology landscape globally in the coming years.
“As the godfather of the Silicon Valley banking ecosystem for the last few decades in the SVB tech world, we believe the negative ripple effects of this historic collapse will have myriad implications for the tech world going forward,” said Dan Ives. analyst at Wedbush Securities said in a note on Tuesday.
SVB’s downfall began last week when it said it needed to raise $2.25 billion to shore up its balance sheet. Venture capital firms asked their portfolio companies to withdraw money from the bank and made it untraceable before other clients could receive their cash. This effectively caused a bank run.
The bank had to sell assets, mainly bonds, at a massive loss.
US regulators shut down SVB on Friday and took control of its deposits. Regulators said on Sunday that depositors in SVBs would have access to their money with the aim of preventing further infections.
According to investors and analysts who spoke to CNBC, the episode has the potential to affect the technology world in a variety of ways, from making it harder for startups to raise funding to forcing firms to change their business models.
‘The last thing we needed’
SVB was crucial to the development of the technology industry, not only in the US but also in places like Europe and even China.
The 40-year-old institution had close ties to the world of technology offering traditional banking services as well as funding companies that were considered too risky for traditional lenders. SVB also provided other services like line of credit and line of credit to startups.
When times were good, SVB flourished. But over the past year, the US Federal Reserve has raised interest rates, hurting the once high-flying technology sector. The funding climate for startups in the US, Europe and elsewhere has become tough.
The collapse of SVB comes at an already difficult time for startup investors.
“This whole Silicon Valley bank is the last thing we needed and completely unexpected,” Ben Harburg, Beijing-based managing partner of China-based venture capital fund MSA Capital, told CNBC.
Startups have had to tighten their belts, while technology giants have laid off tens of thousands of workers to cut costs.
In such an environment, SVBs played an important role in providing credit lines or other tools, allowing startups to pay their employees or get out of difficult times.
“Silicon Valley banks were very patriarchal to the region, they provided not only payroll services, loans to founders against their illiquid credit, but also lines of credit. Those lines to extend their runway, we all expected to overcome the consumption of cash beyond recession.” Matt Higgins, CEO of RSE Ventures, told CNBC’s “Street Signs Asia” on Tuesday.
“That evaporated overnight and there’s no other lender that’s going to step in to fill those shoes.”
Paul Brody, global blockchain leader at EY, told CNBC on Monday that a crypto firm called POAP, which is run by his friend, has half the company’s money tied up in SVB and cannot be taken out. The amount of SVB “may exceed payroll.” POAP founder Patricio Werthalter told CNBC that the company had a “significant amount” of its treasure in SVB and managed to retrieve 50%. However, payroll was “never at risk” and the company has “solid credit lines” if necessary, the founder said.
‘reboot’
The collapse of SVB is likely to prompt startups to pivot their focus to profitability and be more disciplined with their spending.
Taboola CEO Adam Singolda told CNBC’s “Last Call” on Monday, “Companies have to reimagine the way they think about their business.”
Hussain Kanji, co-founder of London-based Hoxton Ventures, said there will be more restructurings in companies over the next three years, though some are closing.
“I see a lot of ‘kicking the road’ behavior that isn’t that helpful. Work hard and don’t delay or procrastinate unless there’s a very good reason for it. Things often don’t get easier in the future. Just because you want to have them,” Kanji told CNBC via email.
Wedbush’s Ives said there could be more busts, adding that early-stage tech startups with weaker hands could be forced to sell or shut down.
“The effects of this past week will have major implications for the tech landscape and in Silicon Valley for years to come,” Ives said in a note on Sunday.
—CNBC’s Rohan Goswami and Ari Levy
Credit: www.cnbc.com /