The rapidly unfolding fallout from Silicon Valley Bank comes at a difficult time for the tech and startup industries. Rising interest rates have hampered the easy access to capital that has fueled rising startup valuations and funded startup projects.
The startup community is still reeling after the go-to place for tech startups rapidly derailed, leaving high-profile clients and investors stranded. Silicon Valley Bank was closed by regulators and placed under the control of the Federal Deposit Insurance Corporation.
SVB served as a vital driver of the tech industry's success and was the 16th largest bank in the United States before its collapse. According to the FDIC, SVB ranked among the top 20 US commercial banks with $209 billion in total assets at the end of last year.
Before the crash, the situation at Silicon Valley Bank may have worsened as more startups felt cash-strapped and needed to withdraw funds. Following the bank's collapse, uncertainty in the startup community increased, with founders worrying about getting their money out, paying salaries, and covering operating costs.
SVB was the dominant bank for tech startups and venture debt, building a reputation for its close relationships with influential venture brokers and taking risks with fledgling startups that few banks have time to spare.
The sudden crash of SVB has left tech investors and startups in a state of economic uncertainty, with many already facing widespread layoffs and limited access to capital. One of the most significant risks for most startups, once SVB crashed, was meeting the payroll of its staff. Pair Team, a seed-funded healthcare startup, and four-year SVB client faced the effects of the SVB crash in meeting the payroll of its team members.
In contact with Crunchbase News via email, Cassie Choi, co-founder and COO of Pair Team, said "The failure of SVB should be a warning sign to other banks, politicians, investors, businesses, and even customers to understand the financial viability of a system we rely on". The SVB crash has created a significant impact on the startup/tech industry as a whole, and "on the other side of bank statements there are real people". She stated.
For startups, several questions and concerns still arise: What will happen to SVB’s clients with venture debt? And what will the SVB crash mean for this vital source of funding?
In addition to providing banking services to many tech startups, SVB served as the largest issuer of venture debt. Venture debt is a loan typically offered by specialized banks or lenders to early-stage and high-growth companies. This is a popular funding method for startups that are growing rapidly but are not yet profitable.
Venture debt allows companies working capital to increase without giving up much equity and also for businesses to raise funds without having to set a new valuation.
According to PitchBook, venture debt has increased over time, recently reaching $26.5 billion in value across 2,419 deals at the end of November 2022. The failure of SVB could have long-term consequences for the future of venture debt. SVB not only served as the largest venture debt lender, but it also provided attractive interest rates to startups.
With SVB likely to be sold to another bank, many predict that startups’ access to funding will be more difficult and more expensive.
While questions about who would fill the SVB's shoes remain, startups are still dealing with the aftermath of the SVB and what it means for their businesses.
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