In Silicon Valley, and specifically for smaller tech firms, the tremors threaten to become a quake.
Just a day after Silvergate Capital said it would shutter and liquidate its bank offering services to the crypto industry, we’re seeing additional focus on liquidity within the banking sector … and how it might impact the smaller companies that are dependent on lending and capital to get off the ground and keep operations going.
As has been widely noted, SVB Financial Group, the parent company of Silicon Valley Bank, saw its shares sink 60% on Thursday, and another 18% in after-hours trading, as the firm sold off a chunk of its holdings at a loss and raised $500 million to shore up its financial position. The company sold $21 billion of U.S. Treasury holdings and securities — and it’s going to realize a $1.8 billion loss on those sales.
SVB also said that it commenced an underwritten public offering, seeking to raise about $1.8 billion through the sale of common equity and preferred shares. One client, General Atlantic, an investment fund, also has committed to invest $500 million, which means that SVB will be raising a total of $2.3 billion. The capital raise offsets the loss on the asset sales.
The company said in a Wednesday update that “we are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.”
Those last comments hint at the fact that the lifeblood for innovative firms, FinTechs among them … is going to be a bit harder to come by. We’re talking about capital, of course. The same businesses that have been the key clients of Silicon Valley Bank — venture capital firms and startups — have been drawing down on their deposits (i.e.., burning through cash). Inflation and higher interest rates are hitting everyone.
For the traditional banking model, there’s a double whammy: Shrinking deposits mean there’s less money to pool and to lend out to other borrowers. In the meantime, the cost of doing business for the bank is more expensive. Margins are pressured, which would tend to dissuade investors from investing in the company (such as buying new shares being issued), as returns would seem to be pressured as well.
In the meantime, in a nod to SVB’s scale and reach, and just what it all portends for tech startup, and FinTech funding, the company’s most recent earnings results show that the firm banked about half of the venture-backed tech and life science companies, and more than 40% of VC-backed tech IPOs. Of its global fund banking portfolio, tech in general is a 39% slice, FinTechs are 3%. Elsewhere on the company’s website, SVB noted that it is “the FinTech industry banking leader,” and has said that 71% of the FinTech IPOs since 2020 were public offerings by SVB clients — and there are $3.8 billion in loan commitments.
For SVB, existing as the go-to financial services provider for these companies and the funds bankrolling them may prove to be a double-edged sword.
As recently reported by PYMNTS, the FinTechs that have gone public through the pandemic now trade at about half of their listed value. It will be harder for these (or other) FinTechs to come to market for new listings; it will be harder for them to get private capital raises … and all of that spells pressure for SVB’s model, which presumably would get some tailwind from those activities.
In the meantime, and as reported by sites such as Bloomberg, Founders Fund, the VC fund co-founded by Peter Thiel, has been advising companies to pull money from SVB. That’s the kind of alarm that, once sounded, sparks bank runs.
Just over a year ago, as reported by PYMNTS, we spotlighted Silicon Valley Bank, and Milton Santiago, SVB’s global head of digital services, noted, “We have the most demanding customers in the world because these are the innovators who focus their lives on transforming how people do business.” Those customers, and the bank that’s made its name serving them, are being put to a test that might have seemed unimaginable just a few days ago.