Silicon Valley Bank Collapse and The Big Lesson for Tech Startups
The technology sector faces another challenge as its go-to specialized bank, Silicon Valley Bank, collapsed after a bank run.
The collapse of Silicon Valley Bank (SVB) on Friday morning was a huge blow to the tech sector, which was already struggling with layoffs and slowdowns. SVB was a major lender to tech companies and startups, but it ran out of cash after a massive withdrawal of deposits by nervous customers.
It was the biggest bank failure in the US since 2008. The government intervened to protect depositors' money, while HSBC agreed to buy SVB's UK branch. Another regional bank, Signature Bank, was also on the verge of collapse and needed government support.
There are a lot of queries that you may wonder: What happened to SVB? What led to its downfall? Why did it affect tech startups so much? And what are the next moves that tech startups should do in the wake of this crisis? In this article, we will provide you with the most comprehensive outlook on this breaking news!
1. What Happened to Silicon Valley Bank?
Silicon Valley Bank's troubles began when the tech sector entered a downturn in late 2022. Many of its borrowers, especially those in emerging fields like biotech, fintech, and crypto, struggled to repay their loans or raise more funding. Some of them defaulted or went bankrupt.
As a result, Silicon Valley Bank's loan portfolio deteriorated rapidly. The bank reported a net loss of $1.2 billion for 2022, compared to a net income of $1.1 billion for 2021. Its nonperforming assets ratio rose from 0.5% at the end of 2021 to 4.5% at the end of 2022.
To make matters worse, Silicon Valley Bank faced a liquidity crunch as customers withdrew their deposits en masse. On March 9th, 2023, customers withdrew $42 billion - nearly a quarter of the bank's total deposits - within a single day. This was triggered by rumors on social media that SVB was insolvent and would be seized by regulators.
The bank tried to calm its customers by issuing statements that it had enough capital and liquidity to meet its obligations. It also sought emergency funding from other banks and investors. However, these efforts were not enough to restore confidence or stop the outflow of money.
On March 10th, 2023, California regulators closed down Silicon Valley Bank and put it under the control of the US Federal Deposit Insurance Corporation (FDIC). The FDIC announced that it would sell SVB's assets and liabilities to another bank within days.
2. Why Silicon Valley Bank Collapse is A Major Hit to Technology Sector, especially Tech Startups?
Hardly people may notice, but Silicon Valley Bank was one of the largest lenders to tech startups in the US and abroad. It had over $300 billion in assets and more than 40% of its loans were to tech companies. It offered specialized products and services customized to the needs of tech entrepreneurs, such as flexible repayment terms, equity financing options, and access to global markets.
The collapse of Silicon Valley Bank, indeed, put tech startups into a dilemma situation. Many tech entrepreneurs lost access to their bank accounts and funds when SVB shut down. This disrupted their operations and cash flow management. Some startups had payroll issues or missed payments to vendors or creditors.
In addition, many tech startups lost their main source of financing when Silicon Valley Bank stopped lending. This made it harder for them to grow their businesses or survive the downturn.
Some startups had to scramble for alternative funding sources or cut costs drastically.
Moreover, many tech startups lost their network and relationships with Silicon Valley Bank's staff and partners, as SVB was known for its expertise and connections in the tech industry. It helped many startups find mentors, investors, customers, and partners through its events, programs, and referrals. The collapse of SVB also affected the broader tech ecosystem, as SVB was a major partner and supporter of many accelerators, incubators, and networking events. Without Silicon Valley Bank, some of these initiatives may lose funding or momentum.
Especially, the climate tech industry was particularly hit by the collapse of SVB, as SVB marketed itself as a climate tech-friendly bank. It offered specialized products and services tailored to the needs of climate entrepreneurs, such as green bonds, carbon credits, and renewable energy financing. More than $28 billion was invested in climate technology start-ups last year, but now many of them may face challenges in accessing capital or scaling up their solutions.
3. What Are The Next Actions That Tech Startups Should Take After SVB Collapses?
The collapse of Silicon Valley Bank is a wake-up call for tech startups that relied too much on one bank or one source of funding. Here are some possible movements that tech startups should consider after the second-biggest failure of US banking:
- Seek alternative sources of financing, such as other banks, venture capitalists, angel investors, crowdfunding platforms, or government grants.
- Cut costs and optimize cash flow by reducing expenses, delaying payments, renegotiating contracts, or selling assets.
- Pivot or adapt their products or services to meet changing customer needs or market opportunities.
- Collaborate or partner with other startups or established companies to share resources, expertise, or customers.
- Explore new markets or regions where there is less competition or more demand for their solutions.
Of course, these are just some general suggestions. The best move for each startup will depend on your specific situation and goals.
While the question about the future of Silicon Valley Bank is still a myth, accurate and determined action at the present is a must. Tech startups should seriously consider this incident as a wake-up call, to consider and re-examine their investing and funding decisions. It’s never too late to start the habit of thoroughly researching the financial viability of the system before impetuously trusting or relying on any other organizations.