Struggles of Silicon Valley Bank Pose New Issues For Tech Startup Market

Orn referred to SVB as “crown jewel of Silicon Valley” and a “strong franchise” that he anticipates will make it through this challenging time & possibly be acquired by a larger bank.

Struggles of Silicon Valley Bank Pose New Issues For Tech Startup Market

Long regarded as the lifeblood of tech startups, Silicon Valley Bank offers conventional banking services while funding ventures and businesses that are deemed too risky for conventional lenders. Venture capital worth billions of dollars flows in and out of the bank’s coffers.

But because of its close ties to technology, the 40-year-old company is particularly vulnerable to the boom-and-bust cycles of the sector, and on Thursday, those risks were made abundantly clear. According to a financial update released late on Wednesday, Silicon Valley Bank was forced into a fire sale of its securities, selling $21 billion worth of assets at a $1.8 billion loss while also raising $500 million from venture capital firm General Atlantic.

SVB’s stock dropped two-thirds of its value last year, then fell another 60% during regular trading on Thursday and another 22% after the close after seeing a 75% increase in the 2021 market rally. The problems strike the Silicon Valley area at a particularly trying time. According to PitchBook, venture capital deal activity dropped over 30% last year to $238 billion.

Even though that is still a historically high number, the lack of IPOs and the ongoing decline in valuations among once-high-fliers indicate that there will be much more suffering in 2023. SVB has been regarded as a stabilising force because it is a sizable, regulated bank. However, the firm’s clientele is becoming increasingly concerned about its most recent financial actions.

According to Scott Orn, operating chief at Kruze Consulting, which provides tax, accounting, and human resources services to startups, “psychologically, it’s a blow because everyone realises how fragile things can be. Orn referred to SVB as the “crown jewel of Silicon Valley” and a “strong franchise” that he anticipates will make it through this challenging time and possibly be acquired by a larger bank.

A retreat by SVB would probably increase the cost of borrowing money for his hundreds of customers. Losing a significant debt provider in the venture debt market “could increase funding costs,” Orn warned.

One of the main issues the bank is having, according to SVB’s mid-quarter update, is the amount of money its clients are spending. Despite the slowdown in venture investing, cash burn has continued at a rapid rate, resulting in a decline in total client funds over the past five quarters.

Client cash burn is still two times higher than it was before 2021 and has not decreased as a result of the slower fundraising environment, according to SVB. SVB predicted in January that average deposits for the first quarter would range between $171 billion and $175 billion.

The revised estimate is between $167 billion and $169 billion. Client cash burn is expected to remain roughly at the same level as it was in the final quarter of 2022, when economic tightening was already well under way, according to SVB.

In a report released on Thursday, analysts at DA Davidson stated that when it comes to spending, “companies have not adjusted to the slower fundraising environment.” The company gave the stock a neutral rating and stated that its caution regarding SIVB shares was due to concerns about a VC market that was “slow to recover.”

S&P downgraded SVB’s rating from BBB to BBB-, leaving it just one notch above junk. As a result of “the deterioration in the bank’s funding, liquidity, and profitability, which prompted SVB to announce actions to restructure its balance sheet,” Moody’s downgraded SVB on Wednesday from A3 to Baa1. Concern has quickly shifted to the possible spread of the disease.

Even after CEO Greg Becker stated in a letter to shareholders that the bank has “ample liquidity and flexibility to manage our liquidity position,” that question was still being asked by investors and tech executives on Thursday.

Mark Suster of Upfront Ventures wrote on Twitter that SVB is solvent and not in violation of any banking ratios. He funds risk-taking and future-oriented ventures that rely on SVB for banking services. SVB’s loan losses remain low, meaning it is not facing the same credit challenges as during the dot-com crash and financial crisis. Analysts are focused on the deposit side of the house.

SIVB is facing pressure from its end markets, and analysts at Wedbush have a hold rating on the stock. Moody’s downgrade highlighted concerns about the bank’s risk profile, but the bank still managed to find reasons for optimism.

In January, private equity and venture capital dry powder hit a record high of $2.6 trillion, an indication that there’s plenty of cash out there for startups. SVB can only hope that it remains a trusted financial source for companies as they look to eventually store a good chunk of that money.