SVB Financial’s Earnings Point to Volatility Ahead for Startups and VC Funding

There’s no easy road ahead for startups — or the funds and banks that invest in them — but then again, it’s all a part of the normal business cycle.

Earnings season, as has always been the case, gives top-line and bottom-line metrics — and share prices react, sometimes in outsized ways. Late last month, SVB Financial (parent company of Silicon Valley Bank) posted earnings that sent the shares down 16% on an earnings miss.

But beyond the vagaries of Wall Street sentiment, parsing some of the numbers and the commentary from management gives a glimpse of startups, of innovation and the public/private that backs it all up.

The Q2 2022 earnings supplementals show that average loans were up 3% in the quarter, year over year, to $69 billion. Of that tally, $14.8 billion had been borrowings from the tech and life sciences sector.

During the quarter, the company recorded a $196 million provision for credit losses. Those higher provisions come in tandem with recession risk, and average client funds were down 3% in the most recent period.

CEO Greg Becker said that the macro environment — Federal Reserve tightening and record inflation — have “nearly closed the IPO market and meaningfully slowed the pace of PE and VC investment.”

Indeed, U.S. backed venture capital (VC) firms that went public declined from $237 billion a year ago to $5 billion in the most recent quarter. U.S. early-stage and VC investments declined from a $35 billion peak late last year to $5 billion in the most recent period.

However, he maintained that the current operating environment, complete with challenges, “is a normal and necessary part of the innovation cycle.” At the moment, said Becker, PE and VC firms have “record levels of dry powder” that can be invested into companies.

Inflows Face Headwinds

Chief Financial Officer Dan Beck noted on the earnings call that inflow from the public markets had effectively shut down during the most recent quarter, where there had been $2 billion invested with SVB compared to $16 billion in the third quarter of last year.

Management said on the call that there could be a 20% sequential decline in private venture funding in the current quarter. (There’s still $2.4 trillion in dry powder that is held globally by PE and VC firms, SVB maintains.)

Related: Silicon Valley Bank’s Digital-First Approach t​o Keeping Tech Innovators Engaged

Drilling down a bit, the company expects to see at least some loan growth in the tech and life sciences space, along with more slowdowns in the mortgage sector, as rates remain elevated. In responding to analyst questions over investment losses — at $137 million in the quarter — Beck said that the majority stemmed from investments in the private and public funds.

Beck said during the call that “good companies are certainly getting fundraising grounds, so we’re seeing that play through. So, this is not a zero-funding environment.”

And in the meantime, said the CEO, the companies that are in the SVB portfolio (and elsewhere) “are more flush with cash than they have ever been in history by a wide margin.” Those cash levels mean that companies are protected from the dangers of illiquidity and can handle the cash “burn” requirements of their operations even in a tough macro environment.