[ This article was originally published here ]
By Dave Cartwright, CISSP
A week is a long time in most business sectors. In the intertwined world of banking and startups, it feels like an eternity as both sides deal with the fallout from the Silicon Valley Bank (SVB) collapse; the financial crisis that hit a slew of startups that suffered losses and disruptions in cash flow, and other banks are now apparently in bad shape after experiencing runs. For tech and cybersecurity startups, not just California ones, that used SVB as their banker or lender (or both), their failure could delay or derail at least part of the next wave of startup-led innovation due to the ability to access finance and cash on deposit, as well as use that money to keep businesses running.
The media has been full of SVB obituaries in the past week. Founded in 1983, it is of his 20he birthday shouting about its ranking among the top 160 (out of 8,000) banks in the US, its 9,000 clients, and the 30,000 companies it had supported over the years. Fast forward to 2023 and SVB had become the 16thhe the largest bank in the US… right up until it all came crashing down just a few months shy of his 40he birthday.
Like many institutions, SVB had taken a hit in the days of the dotcom bubble (its share price halved), but it survived to fight another day due in part to being apparently well run and having an appetite fairly cautious and moderate risk. In addition to working with tech startups, he invested heavily in government bonds, a financial instrument considered among the safest investments on offer. In the mid-2010s, SVB estimated to have investments in more than half of the tech startups in the US, and the share price had been doing well for a while in recent years: 219 cents in June 2020, it had risen steadily. to 754.84 in November 2021, though by the end of 2022 it was back in the low 200s.
How did this happen?
What went so wrong in March 2023? After all, while COVID-19 was eating away at government budgets around the world, the technology industry was making hay (particularly companies that allowed people to work remotely, collaborate technologically, or maintain/improve cybersecurity). . The problem was that SVB had invested heavily in the aforementioned government bonds. Words like “complex” are used to describe how bonds work, but in summary: If you invest in something with a fixed income (i.e., an interest rate) and interest rates on anything else rise, the value of your investment falls like an anvil With global inflation rising and interest rates rising in an effort to reduce inflation, those government bonds actually became a problem rather than a safe haven.
Publicly traded companies have some uncomfortable rules: Everything they do must be made public, and when what they have to do is undesirable, the stock price falls. SVB told the world it had to sell its bonds at a loss to stay in business, and two days later the California regulator that “he[had]taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency.”
The customer impact of a bank collapse
How have companies been affected? in a Arti Raman, founder and CEO of data encryption company Titaniam, said: “There was a lot of stress building up over the weekend. [immediately after the crash]. And…as of Thursday…a lot of interbank transfers, a lot of secondary impacts on four or five other banks as people rushed their money out of the smaller banks to the larger banks. Therefore, we have not finished seeing the impact of SVB by any means”.
For the many startups that have banked with SVB, in the US, UK and beyond, the problems are real. With the parent bank effectively collapsed and under the control of the regulator, it has hit many companies hard. The money in deposit has been lost. That money may have been income, it may have been the product of a financing round, it may have been a loan. In all cases, it means a major balance sheet hit or cash flow disruption. Some startups have raised concerns about their ability to pay payroll, others talk about concerns about paying their rent, leasing equipment, licensing fees for technologies and patents, etc.
With over 17,000 cybersecurity startups worldwide, the majority in the US and most with at least some transient business connection to SVB. Cybersecurity is one of the most active sectors for investors, and a significant amount of that investment will have passed through or been deposited in SVB, due to its popularity among many private equity and venture capital players in the technology sector. The concern is that the delay and financial disruption could result in staff leaving or being laid off due to payroll issues or the need to downsize to conserve cash, product development being delayed or shelved due to shortages of resources. funds and businesses simply shut down completely because of their money on deposit is lost or tied up in a long red tape before the government reimburses anything. It all adds up to another form of supply chain disruption, only in this case it is the innovation and not just the product or physical components that is at risk.
At this point, we should note that there is a noticeable wave of destabilization in the banking sector right now beyond SVB. Signature Bank, a New York-based boutique bank went bankrupt on March 12, 2023. It faced a similar problem, as the collapse of SVB caused many of Signature’s clients to withdraw their deposits out of similar concerns about liquidity risk. . About 90 percent of Signature’s deposits were not covered by the US government guarantee that insures the first $250,000 of deposits, while 85 percent of SVB’s deposits were also uninsured. Credit Suisse, one of the world’s largest banks, has been forced to turn to the Swiss central bank this week for $54 billion to bolster its liquidity, while First Republic, a mid-size US bank, is being backed by other US banking giants to prevent a bank run that causes another market crash.
What happens next?
Now that the dust has settled, the light at the end of the tunnel seems to be clearer. In the UK, HSBC has acquired the UK arm of SVB for the princely sum of £1 ($1.21) after it was seized by the regulator to prevent its collapse. In the US a new entity, , has risen from the ashes of SVB, stating that “The bank is open for business and new and existing depositors have full access to their money and protection for their deposits.” It means account holders can still get all their money back, but with the prospect of administrative delays while the new bank takes over the business it is inheriting.
The demise of SVB was a far cry from the financial disasters that befell the world in 2008. Yet it is a stark reminder that things can go very wrong, very quickly. More importantly, it’s a thankfully rare example of the potential for disaster when a massive percentage of a particular industry, in this case technology, has their money in a bank.
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