The collapse of the Silicon Valley bank will hurt the start-up world despite the bailout

  • Regulators have found a solution for SVB bank depositors, potentially averting a widespread run on regional banks.
  • But the long-term crisis in innovation funding following the Silicon Valley Bank implosion is only just beginning.
  • From the Rust Belt to the UK, Egypt and Nigeria, the bank’s role in funding innovation has been critical to economic growth.

A U.S. flag flies in front of a Silicon Valley Bank branch in Wellesley, Massachusetts, the United States, March 13, 2023.

Brian Snyder | Reuters

In the near term, regulators have found a solution for Silicon Valley bank depositors and, we hope, allayed fears of a major run on regional banks. Attention will now shift to the longer-term crisis facing the global innovation financing system. The much-admired US system for generating innovations has just taken a serious hit, and the turmoil that led to the death of Silicon Valley Bank is not over yet.

We are here as two women working in technology and finance to call for serious consideration of the funding needs of today’s innovators – medium term as they struggle to survive the current turmoil and long term as they innovate that enable this to lead to economic growth.

Founded in 1983, Silicon Valley Bank emerged at a time when Silicon Valley was synonymous with “tech” and “innovation.” This is no longer the case. Over the past 50 years, the tech community has evolved into a global system that supports many different types of innovation. The SVB was the crown jewel of the banking and venture capital industry, not just in Silicon Valley but around the world.

The giant venture funds and $100 million California-based startups still attract attention, but investors and tech companies around the world look far different from that cliché. They are primarily small business owners, who in turn are often loyal employers and supporters of their communities.

Geographically, this community is widespread. In the Midwest, former Rust Belt, and Southern United States, where Silicon Valley and its bank have been held up as role models, there are probably hundreds of corporations and venture capital funds with accounts and loans at the bank, and many more at other middle-class banks . Small, specialty, and mid-sized banks are often better at offering financial products to small business owners and introducing them to others who might be able to help them. You can also provide more industry-specific advice.

With total venture capital funding falling, interest rates rising at the same time and the uncertainty of the current climate clouding the paths for small business growth and expansion. Today’s prospects are challenging for tech entrepreneurs as their businesses are inherently risky. Market fluctuations can affect your journey quickly and very significantly.

What the tech startup community actually looks like

Although tech startups that receive millions of dollars in funding make the headlines, the vast majority of tech companies are on tight budgets. Together they employ millions of people. Two years ago, researchers from the University of North Carolina and the National Venture Capital Association found 3.8 million employees in companies that received venture investments between 1990 and 2020 — 62.5% of them were outside of California, Massachusetts and New York.

Start-ups and venture funds we know personally in upstate New York and Massachusetts are depositors in SVB; These communities are a far cry from the more well-known tech communities of Palo Alto or San Francisco.

Around 2,500 venture capital companies had accounts with the SVB. It’s easy to picture these as large corporations, and a tiny handful of famous venture firms have hundreds of employees. But the average venture firm in the United States had $56 million in assets, according to the National Venture Capital Association, and was investing the money in startups on behalf of wealthy individuals and funds. This mid-size means many companies have less than $1 million in revenue.

Angel investors and operators also invested extensively in SVB; These companies – mostly sole proprietorships – are much smaller.

An unknown but probably fairly large percentage of Silicon Valley’s account holders are startups and venture funds in tech markets in other countries, where tech startups are viewed as an integral part of wealth and economic growth. Many emerging market venture capital funds and start-ups trusted Silicon Valley Bank with their deposits and as their lender, believing their money was in a well-regulated economy with credibility. Yesterday, the CEO of a company called Chipper Cash wrote about how important Silicon Valley Bank was in their journey.

“A little known fact is that 5 years ago when I tried to open Chipper’s first bank account, SVB was the only bank that would accept us. I know there are countless other startups all doing very important work and the same thing would say,” wrote the CEO, Ham Serunjogi. Chipper Cash facilitates cross-border money transfers and operates in the African continent.

Further afield from Silicon Valley are tech communities in Egypt, the UK, Botswana, Kenya and Nigeria, places that depend more than ever on technological innovation. We also know founders there who are concerned about the security of the US financial system. Ease and quick action from the US government has helped, but emerging market entrepreneurs now have fewer options in an already tight funding market.

Short term losses

The SVB functioned differently than a traditional bank. The tech-focused bank was a meeting place for entrepreneurs, and founders flocked to SVB for much more than just seed funding. The bank provided a place for venture capitalists and entrepreneurs to meet, creating invisible but vital webs of human connections. It made quick turnarounds on mortgages; Larger and more traditional banks are often reluctant to approve mortgages for entrepreneurs, even experienced ones. Silicon Valley Bank employees led and mentored founding teams at growing companies, invested in startups and backed the venture capitalists who worked with them.

Techstars, one of the largest pre-seed investors in the world, holds interests in portfolio companies with a market capitalization of $96 billion. The franchise has managers and founders who exclusively bank with SVB. Y Combinator, a startup accelerator, said that a third of startups exposed to Silicon Valley Bank used SVB as their only bank account. Both of these investor accelerators likely leveraged Silicon Bank for its specialized tools, network, and knowledge.

In fact, countries around the world are trying to replicate the innovation infrastructure of the United States. According to recent reports, the government is still trying to find a buyer for important SVB units in an auction process. Unless key elements of SVB are brought under the wing of a larger institution with this technological and financial expertise intact, the United States must support the rebuilding of something like this if it hopes to continue producing high-level innovations.

Long-term impact on innovation

The United States gained an innovative edge starting in the 1950s when the US federal government poured money into research and development after the Soviet Union launched Sputnik. The result was the development of the silicon chip. Venture capital (and later seed and angel investing) emerged as an industry to provide the special kind of venture capital needed to fund people with ideas who don’t necessarily have experience running businesses. This entire financial system is based on the idea that because it is so difficult to bring an innovation to market, the innovators need specialized help.

This type of funding has helped spawn very large companies, including Amazon and Microsoft. Although it advertised its role in building great companies, the SVB was also an important part of the financial system for deeper innovation. According to Crunchbase, an estimated 12% of SVB’s assets were invested in biotech companies.

Funding and supporting risk-takers, wherever they are, is critical for the United States to keep the country ahead and, in turn, support other nations that are strongly committed to similar, like-minded causes. It goes without saying that there are other countries willing to take on the mantle of innovation. Rebuilding innovation funding will be part of this hopefully healthy competition.

The ultimate cost of collapse

We are not writing to absolve bank executives or the tech community of responsibility in this situation. There were some telltale signs months ago that the bank’s assets were trailing its liabilities. If there is misconduct or a gross misjudgment at the bank, those responsible should be held accountable. The tech community should also focus on creating a financial infrastructure that is resilient in the face of changes in the economy. Volatility is a constant in today’s world.

We are encouraged that regulators believe that the Silicon Valley bank contagion will not spread to the rest of the financial system. Regulators should also consider the signal they are sending to innovators and entrepreneurial minds around the world. As of yesterday, SVB depositors have received a backstop, a guarantee that the FDIC will allow them to continue their businesses and an assurance that they will recover.

But the damage to businesses and communities, and innovation ecosystems around the world, could continue to be severe, especially in an environment where the Federal Reserve continues to hike interest rates. The immediate banking crisis is over. Now is the time to rebuild a new innovation funding system to meet today’s demands. If the United States doesn’t do it, another country probably will.

– By Pia Sawhney, Partner and Head of Strategy at Armory Square Ventures (ASV), a mission-driven technology venture capital firm based in the Finger Lakes area of ​​upstate New York; and Dina Sherif, executive director of the MIT Legatum Center for Entrepreneurship and Development. ASV and its portfolio companies did not have accounts with Silicon Valley Bank.

Leave a Reply

Your email address will not be published. Required fields are marked *