The collapse of Silicon Valley Bank could have repercussions for the tech landscape for years to come, analysts and investors said.
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Silicon Valley Bank has been the backbone of many startups and venture capital funds around the world. The effects of its collapse, the largest banking collapse since the 2008 financial crisis, are likely to be felt across the global tech landscape for years to come.
“As SVB has essentially been the godfather of Silicon Valley’s banking ecosystem in the tech world for the past several decades, we believe the negative impact of this historic collapse will have a variety of implications for the tech world going forward,” said Dan Ives, Analyst at Wedbush Securities said in a note on Tuesday.
SVB’s collapse began last week when the company said it had 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 other clients tried to get their money before it was no longer available. This effectively led to a bank run.
The bank had to sell assets, mostly bonds, at massive losses.
US regulators shut down the SVB on Friday and took control of its deposits. Regulators then said on Sunday depositors at the SVB would have access to their money in a bid to stop further contagion.
However, according to investors and analysts speaking to CNBC, the episode has the potential to impact the tech world in a variety of ways, from making it harder for startups to raise capital to forcing companies to change their business model.
“The last thing we needed”
SVB has been critical to the growth of the tech industry, not just in the US, but in places like Europe and even China.
The 40-year-old institution had close ties to the tech world, offering traditional banking services and financing companies that were considered too risky for traditional lenders. The SVB also provided other services such as lines of credit and lines for startups.
In good times, the SVB did well. But over the past year, the Federal Reserve has raised interest rates, hurting the once-boosting tech sector. The funding environment has become more difficult for startups in the US, Europe and elsewhere.
SVB’s collapse came at an already difficult time for start-up investors.
“This whole Silicon Valley Bank thing is the last thing we needed and was totally unexpected,” Ben Harburg, managing partner of Beijing, China-based venture capital fund MSA Capital, told CNBC.
Startups have had to tighten their belts, while tech giants have cut tens of thousands of workers to cut costs.
In such an environment, the SVB played a key role in providing lines of credit or other tools that enabled startups to pay their employees or get through tough times.
“Silicon Valley Bank was very paternalistic to this sector, they not only provided payroll services, loans for founders against their illiquid loans, but also lines of credit. And many of these companies were already struggling to raise equity, and they were counting on these lines to extend their runway to extend the cash burn beyond the recession that we’re all expecting.” 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 head at EY, told CNBC on Monday that a crypto firm called POAP, run by his friend, has half the company’s money tied up in SVB and can’t get it out. The amount at SVB is “more than payroll can cover,” suggesting it could be difficult to pay employees. A company spokesman was not immediately available for comment, and CNBC was unable to independently verify Brody’s comments.
The collapse of SVB is also likely to shift focus to startups to focus on profitability and be more disciplined with their spending.
“Companies need to reboot the way they think about their business,” Taboola CEO Adam Singolda told CNBC’s Last Call on Monday.
Hussein Kanji, co-founder of London-based Hoxton Ventures, said there will be more corporate restructuring over the next three years, although some are cautious.
“I see a lot of ‘kick the can down the road’ behavior that’s not that helpful. Do the difficult things and don’t hesitate or hesitate unless there is a very good reason to do so. Things often don’t get any easier in the future simply because you wish,” Kanji told CNBC via email.
Wedbush’s Ives said there could be more collapses as well, adding that early-stage tech startups with weaker hands could be forced to sell or shut down.
“The impact of the past week will have a major impact on the tech landscape and Silicon Valley, in our view, for years to come,” Ives said in a note Sunday.
– CNBC’s Rohan Goswami and Ari Levy contributed to this report.