Signs for the high-tech commercial bank Silicon Valley Bank, on Sand Hill Road in the Silicon Valley city of Menlo Park, California, on August 25, 2016.
Smith Collection | Gado | Stock Photos | Getty Images
Silicon Valley Bank has long been considered the lifeblood of tech startups, providing traditional banking services while financing projects and businesses deemed too risky for traditional lenders. Billions of dollars in venture capital flow in and out of bank coffers.
But the 40-year-old company’s intimate ties to technology make it particularly vulnerable to the industry’s boom, and on Thursday those risks became abundantly clear.
SVB was forced into a fire sale of its securities, offloading $21 billion worth of its holdings at a loss of $1.8 billion, while raising $500 million from venture capital firm General Atlantic, according to a financial update late wednesday. After the stock surged 75% in the 2021 market rally, SVB lost two-thirds of its value last year and since raged another 60% during regular trading on Thursday.
For the Silicon Valley region, the problems come at a particularly difficult time. Venture capital deal activity fell over 30% last year to $238 billion, according to PitchBook. While that’s still a historically high number, the lack of IPOs and the continued decline in valuations among one-time highflyers suggest there’s a lot more pain to come in 2023.
As a large regulated bank, SVB has been seen as a stabilizing force. But its latest financial maneuvers are raising alarms among the company’s customer base.
“Psychologically, it’s a blow because everyone realizes how fragile things can be,” said Scott Orn, chief operating officer at Kruze Consultingwhich helps start-ups with tax, accounting and HR services.
Orn called SVB a “crown jewel of Silicon Valley” and a “strong franchise” that he expects to survive this difficult period and even potentially be acquired by a larger bank. For his customers, who number in the hundreds, a withdrawal from SVB would likely make it more expensive to borrow money.
“Losing a major lender in the subprime market could drive up the cost of funds,” Orn said.
According to SVB’s mid-quarter update, one of the primary problems facing the bank has to do with how much money customers are spending. Total client funds have declined over the past five quarters as cash burn has continued apace despite the decline in venture capital.
“Customer cash burn is still ~2x higher than pre-2021 levels and has not adjusted to the slower collection environment,” SVB said.
In January, SVB expected average deposits for the first quarter to be $171 to $175 billion. That forecast is now down to $167 to $169 billion. SVB expects customers to continue burning cash at roughly the same level as they did in the last quarter of 2022, when economic tightening was already underway.
Analysts at DA Davidson wrote in a report Thursday that in terms of spending, “companies have not adjusted to the slower fundraising environment.” The firm has a neutral rating on the stock and said concerns “over a slow recovery in the VC environment have kept us cautious on SIVB stock.”
S&P downgraded SVB to BBB- from BBB, leaving it just one notch above its junk rating. On Wednesday, Moody’s downgraded SVB to Baa1 from A3, reflecting “the deterioration of the bank’s funding, liquidity and profitability, which prompted SVB to announce measures to restructure its balance sheet.”
Concerns have quickly turned to the potential contagion effect. Are the bank’s acknowledged misfortunes leading customers to withdraw their money and house it elsewhere? That question circulated among investors and tech executives Thursday, even after CEO Greg Becker wrote in a letter to shareholders that the bank has “ample liquidity and flexibility to manage our liquidity position.”
“More in the VC community need to speak out publicly to quell the panic about @SVB_Financial,” Mark Suster at Upfront Ventures wrote on Twitter. “I believe their CEO when he says they are solvent and not breaking any banking conditions & The goal was to raise and strengthen the balance sheet.”
Suster finances the types of risk-taking and future-oriented ventures that rely on SVB for banking services.
In the case study section of the company’s website, for example, SVB highlights a loan to a solar panel supplier Sun rundebt offerings for autonomous construction equipment provider Built Robotics and financing solutions for marine drone startup Saildrone.
SVB’s credit losses are still low, meaning it is not, at least for now, facing the kind of credit challenges the bank faced during the dot-com crash and financial crisis, when interest rates soared. Rather, analysts are focused on the deposit side of the house.
“Given the pressures in their end markets, particularly the elevated levels of client liquidity burn, SIVB sees continued significant outflows of client funds, both on and off balance sheet,” wrote analysts at Wedbush, which has the equivalent of a hold. rating on the share. That recommendation is “based on SIVB’s growth normalizing after an exceptional 2020-2021 and our belief that the VC market may remain challenged in the coming quarters.”
Moody’s downgrade pointed specifically to concerns about the bank’s risk profile, noting that “the balance between shareholder and creditor interests posed higher than average governance challenges.”
SVB still managed to find reasons for optimism. In a section of its report titled “Continuing Underlying Momentum,” the bank noted that private equity and venture capital dry powder hit a record in January at $2.6 trillion, an indication that there is plenty of money out there for startups.
SVB can only hope that it remains a reliable financial source for companies as they make sure to eventually store a good portion of this money.
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