Silicon Valley Bank failure might further stymie tech funding
While the finance and tech sectors shuddered after the sudden demise of two tech-focused banks, financial damage appears to be contained amid general slowdown in tech funding.
The sudden collapse of Silicon Valley Bank and Signature Bank in New York sent jitters through venture-backed tech companies, but the financial fallout appeared to be contained after quick federal action to reimburse depositors.
The banks' demise comes after a larger slowdown in tech funding that began last year. That downturn erased millions of dollars in value from both startups and tech giants, all but killed tech IPOs, and triggered more caution by investors in committing initial financing to startups and successive funding rounds to fast-growing companies.
Their collapse seems to be a worsening of the most recent financial turbulence in tech and is reminiscent in some ways of the 2008 financial crisis. But early this week, the stock market and economy appeared to shrug it off, with little panic selling and the major market indexes up on Tuesday.
"Silicon Valley Bank still has a lot of cash on its balance sheet. It just doesn't have enough money if all depositors were to redeem at the same time," said Jay Jung, founder and managing partner of Embarc Advisors, a financial advisory firm that works with startups and venture capital companies. "And because the government is saying, 'Hey, don't worry about it,' that kind of alleviates the market's concerns."
Even so, after Silicon Valley Bank was shut down by federal banking regulators last week, and the Federal Deposit Insurance Corp. (FDIC), Treasury Department and President Joe Biden stepped in to reassure customers of both banks over the weekend and on Monday, tech vendors and their investors worried about the availability of cash to run companies and stay afloat in a volatile but still active market.
Some observers blamed Silicon Valley Bank for its own demise, in large part for allegedly ignoring the Federal Reserve's months-long campaign to dramatically hike interest rates, which decimated the value of the bank's capital tied up in long-term, low-yield bonds.
"They were distracted and giddy with all the cash they had," said R. "Ray" Wang, founder and analyst at Constellation Research, on Tuesday. "They thought interest rates were not going to keep rising, so they really messed up."
The public relations firm for the bank, which is now being run by Silicon Valley Bank, N.A., a new FDIC-operated bridge bank, did not immediately respond to a request for comment for this story.
One venture capitalist declined to comment for this story on Monday because her focus, like that of many other VCs, is on working with startup founders to manage the unexpected tech banking crisis.
Countless tech vendors, mostly startups, did business with Silicon Valley Bank -- the country's 16th-largest bank, in business for 40 years -- as well as with the smaller Signature Bank, which concentrated on the legal services industry as well as tech companies. Now, with their cash assets frozen -- at least temporarily -- some tech companies worry about meeting payroll and paying other operating costs.
However, most of the banks' customers are expected to survive and return to business as usual, according to tech industry and startup observers.
Not a disaster
Both banks had billions of dollars in reserves -- perhaps not enough to cover the disaster scenario of all depositors pulling their money out at once, but adequate to meet the week-by-week needs of most smaller companies, especially with federal guarantees.
Most reassuring is that the federal government ensured depositors will be able to redeem their full assets -- not just the up to $250,000 the FDIC is required to guarantee by law.
Nonetheless, the collapse of Silicon Valley Bank was a stunning blow to the collective ego of Silicon Valley, the longtime center of the tech and tech funding universe dating to the founding of the semiconductor industry in the 1950s and the rise of tech venture capital and personal computers in the 1970s.
Alan Pelz-SharpeFounder and analyst, Deep Analysis
Today, the Northern California region still rules the tech world in terms of concentration of capital, innovation and research.
A blow to the tech capital
"This is a slap in the face to Silicon Valley," said Alan Pelz-Sharpe, founder and analyst at Deep Analysis. "But I don't think it will have a long-term effect, to be honest. There's a short-term effect in that people can't get their money overnight."
Also in the short term, the banking crisis might lead to further retrenchment as an extension of the venture capital pullback that started about a year ago amid a near recession as well as still-rampant inflation even with the Federal Reserve's dramatic interest rate raising campaign, Pelz-Sharpe said.
In this light, the widespread tech industry layoffs of recent months are indicative of a needed market correction, he said.
Meanwhile, Wang said -- and The New York Times reported on Tuesday -- that Silicon Valley Bank "forced their clients to bank with them."
"In return, they got cheaper loans for mortgages, autos, boats and jets," he said.
"It's been harder for people to raise money for sure over the past year," Pelz-Sharpe said. "But the flip side is that's not necessarily a bad thing. Where you have companies getting series B funding and they haven't made any money -- well, that's not going to wash anymore.
"There's much more focus on actually turning a profit now, and many of us would argue that's a healthy thing," he continued.
As for blame for the banking failures, Jung cited the banks' lack of diversification plus over-reliance on long-maturing, low-yield Treasury bonds that tied up a lot of their depositors' money.
Being so tech-heavy, especially in Silicon Valley Bank's case, made it difficult for the bank to sustain a run of withdrawals as company after company sought to escape what they saw as impending disaster.
"The problem in this case for Silicon Valley Bank was it had a ton of deposits in 2021 because all these startups raised capital and did IPOs, but in the last 12 months, as we all know, startup capital raising slowed down," Jung said.
Meanwhile, startups continued to burn through cash without replenishing through further fundraising -- depleting their deposits at Silicon Valley Bank, Jung explained.
And Silicon Valley Bank couldn't cash in its low-interest bonds before they matured without incurring huge losses.
"Silicon Valley Bank had its money tied up in long-dated assets," Jung said. "When it came time to redeem capital, the money was tied up."
Shaun Sutner is a journalist with 34 years of experience, including 25 years as a reporter for daily newspapers. He is news director for TechTarget Editorial's information management team, covering artificial intelligence, customer experience and unified communications software, and analytics and data management technology.