The collapse of the Silicon Valley Bank could have implications for the technology landscape in years to come, analysts and investors said.
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Silicon Valley Bank was the backbone of many startups and venture capital funds around the world. The fallout from the collapse, the biggest bank failure since the 2008 financial crisis, is likely to be felt globally in the technology landscape for years to come.
“With SVB essentially the godfather of the Silicon Valley banking ecosystem for the past few decades in the tech world, we believe the negative impact of this historic collapse will have a myriad of implications for the tech world going forward,” Dan Ives, analyst at Wedbush Securities, said in a note Tuesday.
SVB’s collapse began last week when it said it needed to raise $2.25 billion to strengthen its balance sheet. Venture capital firms told their portfolio companies to withdraw money from the bank and other clients tried to get their money before it became unreachable. This effectively led to a bank run.
The bank had to sell assets, mainly bonds, at a huge loss.
US regulators closed SVB on Friday and took over the deposits. Regulators then said on Sunday that savers would be able to access their money at SVB, in an effort to stop further contagion.
But the episode has the potential to impact the technology world in several ways, from making it harder for startups to raise funds to forcing companies to change their business models, according to investors and analysts who spoke to CNBC.
‘Last thing we needed’
SVB was critical to the growth of the technology industry, not only in the US, but also in places like Europe and even China.
The 40-year-old institution had a close connection to the technology world, offering traditional banking services as well as finance companies that were deemed too risky for traditional lenders. SVB also provided other services such as credit lines and lines to startups.
SVB flourished in good times. But over the past year, the US Federal Reserve has been raising interest rates, hurting the once booming technology sector. The funding climate has become more difficult for startups in the US, Europe and elsewhere.
The collapse of the SVB comes 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 laid off tens of thousands of workers to cut costs.
In such an environment, SVB played a key role in providing credit lines or other tools that would allow startups to pay their employees or get through tough times.
“Silicon Valley Bank was very paternalistic towards this industry. They not only provided payroll services, loans to founders against their illiquid credit, but also lines of credit. And many of these companies were already struggling to raise equity and they were counting on that lines to extend their runway, to push the cash burn past the recession we all expect.” 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 leader at EY, told CNBC on Monday that a crypto company called POAP, which is run by his friend, has half of 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 may be difficult to pay employees. A company spokesperson was not immediately available for comment, and CNBC was unable to independently verify Brody’s comments.
The collapse of the SVB is also likely to put the focus on startups to become more profitable and more disciplined with their spending.
“Companies are going to have 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 waiting.
“I see a lot of ‘kick the can down the road’ behavior that isn’t that helpful. Do the hard stuff and don’t procrastinate or procrastinate unless there’s a good reason for it. Things don’t often get easier in the future just because you want to,” Kanji told CNBC via email.
Wedbush’s Ives said there could also be more collapses, adding that early-stage tech startups with weaker hands could be forced to sell or close.
“The impact of the past week, in our view, will have major implications for the tech landscape and Silicon Valley for years to come,” Ives said in a note Sunday.
—Rohan Goswami and Ari Levy of CNBC contributed to this report.