What does the Silicon Valley Bank crisis mean for UK investors?

Uncertainty. Panic. Urgent.  

Three words which those keeping up with the failure of Silicon Valley Bank have heard a considerable amount over the past few days. As the SVB collapse unfolded in a catastrophic 48-hour period last week, businesses were left deeply uncertain about the future. 

SVB depositors will get their money back 

There has been a substantial amount speculation has been made over the past couple of days regarding where SVB’s assets will end up. On Sunday, the US government stepped in to protect the bank’s customers’ funds in a bid to prevent contagion from spreading across the financial services sector. The response has been hailed as a “saving grace for start-ups" and solved a litany of immediate problems.  

For UK businesses, the answer unfolded on Monday, with the news breaking that the UK government has facilitated the sale of the UK subsidiary of the bank, with around 3,000 customers, to HSBC for £1. The government had to move quickly on this with the Spring Statement due Wednesday 15 March, as the optics of a key bank, which services the thriving start-up culture in the UK, collapsing were terrible.  

Could a challenger bank fill the void?  

The main high street banks tend not to be supportive of start-ups as they are perceived as higher risks. However, the sale to HSBC does raise some questions, as many startups and venture businesses used SVB because they were better to deal with those big banks. This begs the question, will the start-ups affected want to stick with HSBC?  

Sentiment in the start-up community is mixed, some founders are prepared to take “a wait and see” approach while others have or are preparing to move funds to traditional banks. It is without doubt that other banks will assume the banking role for the venture market, and the business will be spread across many banks.  

The void left by SVB in the market will close at some point. Ultimately, the market for early-stage lending will be covered by other lenders. The $5.5 billion in investor-dependent loans (early-stage lending) SVB had been large, but it is a drop in the bucket of the total capital that makes it to VC-backed startups on a yearly basis. 

What was the role of venture capital in the crisis?  

The Washington Post has authored an article analysing the role of venture capital played in the crisis. The core question which has arisen commentators is: why did some funds not tell their portfolio companies to diversify from SVB? When founders go to venture capital, they are not only seeking funds, but also, advice- not dissimilar to management consulting firms. SVB had been on the radar as being a risk since November 2022. 

SVB was undone by short sellers who had been gradually pushing up their bearish interest in bank stocks, betting that the Federal Reserve’s rate hikes were not good news for financial institutions. Thus, if SVB was forced to sell its securities holdings, it would have incurred a $15.9 billion loss, wiping out its entire tangible common equity.  

To compound this, the client base was too concentrated. If venture capital funding suddenly dried up or there was a bank run, clients would withdraw their money. With this kind of profile, why did some venture capital funds allow their portfolios to deposit all their cash with one bank.  

The Washington Post concludes that “SVB’s collapse and its rippling effect in the start-up world is a sign that VC funds have lost their discipline. With so much money flooding into their world, they stopped managing known risks. They became simple pass-throughs, shovelling money from one end to another.” The collapse of SVB highlights the risk venture capital and private equity owners face. This time they were saved by the US and UK governments, but what happens when the next bank collapses?  

The collapse of SVB in the context of 2023 

Investment levels stay high on deal-count basis compared to any year outside of 2021, and there is a considerable amount of dry powder. But there is still a significant decline in the market. According to Pitchbook, deal value has declined by two-thirds over the past four quarters. Analysts are forecasting that Q1 2023 is looking to be similarly low in terms of dollars invested as Q4 2022, and there is little sign the IPO market will pick up any time soon to relieve pressure building within the market. 

So, what is next?  

As companies grow, financial risks evolve. Transformational changes such as M&A transactions can give rise to their own treasury risks that must be managed, but also result in the need to update existing treasury management policies and processes.  

Marks Sattin is helping several venture capital and private equity funds build out their treasury teams. As the UK’s leading finance and accountancy recruitment consultancy, we are uniquely placed to consult on your business's talent requirements.