Silicon Valley Bank (SVB) has been a pillar of support for startups in the tech industry, providing them with financial resources, guidance, and networking opportunities. However, the bank is currently facing a crisis that could have significant implications for startups such as legal tech startups in Silicon Valley and beyond.
Startups had parked large deposits at the bank in recent years, but now had to liquidate them faster than expected in light of rising interest rates. To be able to continue to provide customers with money, the bank had to sell bonds which brought losses because of recent price drops on the bond market. Then, the bank wanted to raise liquid funds via an emergency capital raise. But the attempt to raise fresh money from investors by issuing new shares caused further uncertainty.
What are the remedies?
The U.S. government reacted to the bankruptcy of SVB recently. U.S. President Joe Biden announced to do whatever is necessary and to implement stricter rules in bank regulation. Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and the U.S. Deposit Insurance Corporation (FDIC) announced that taxpayers will not have to bear any losses associates with the resolution of SVB.
The U.S. Deposit Insurance Fund (FDIC) has transferred all deposits of the collapsed banks to a newly formed bridge bank. SVB’s board appointed a five-member committee to restructure the institution. Together with other officials, the independent committee is to look for strategic alternatives for SVB Holding.
The U.S. government has given advance assurances that all deposits would be protected. Customers are expected to be able to access all their money.
Meanwhile, HSBC bought the UK arm of SVB for £1, mitigating the risk for UK tech firms to lose liquidity. Businesses who had been unable to withdraw their money recently are now able to access it again.
What to expect?
The crisis at SVB could undermine the confidence that startups have in the financial ecosystem. Startups often rely on banks to provide financing and support, and the collapse of a major player like SVB could create uncertainty and doubt about the stability of the financial system as a whole.
Startups depend heavily on access to capital to fund their growth and development. SVB provided the funding startups needed. So, the bankruptcy of SVB could leave many startups struggling to secure the financing they need to survive and grow.
Moreover, the bank’s crisis has an impact on its ability to provide services to its clients, including startups. This could cause delays or disruptions to critical services such as wire transfers, credit lines, and account management. Startups that rely on these services to operate their businesses could face significant challenges if they are unable to access them.
Silicon Valley Bank has played a critical role in supporting the growth and development of the tech industry in Silicon Valley and beyond. The crisis at the bank could have a negative impact on the broader ecosystem, affecting other financial institutions, venture capitalists, and startups that rely not only but especially on SVB’s services.
However, several experts believe that the impacts will be rather mild. An infection of the broader ecosystem is not impossible but seems to be rather unlikely at the moment. Startups should be prepared for the possibility of a more challenging financing environment nevertheless, and they may need to consider alternative sources of funding.