Silicon Valley Bank for high-tech commercial bank on Sand Hill Road in Mello Park, California, on August 25, 2016.
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Silicon Valley Bank is considered the lifeblood of tech startups, providing traditional banking services, financing projects and companies that are too risky for traditional lenders. Billions of dollars flow into bank coffers in venture capital.
But the 40-year-old company’s close ties to technology are particularly sensitive to the industry’s boom and bust cycles, and on Thursday those risks became all too clear.
SVB was forced to sell its securities in a fire sale, shedding $21 billion worth of holdings at a loss of $1.8 billion, as it raised $500 million from venture capital firm General Atlantic, according to a financial update late Wednesday. In the year After the stock surged 75 percent in a 2021 market rally, SVB lost two-thirds of its value over the past year and fell another 60 percent in regular trading on Thursday.
For the Silicon Valley region, the problems come at a particularly difficult time. Venture capital deal activity fell more than 30 percent to $238 billion last year, according to Pitchbook. While that’s still a historically high number, the lack of IPOs and declining valuations among the top flash stocks at one time suggests more pain is to come in 2023.
As a large regulatory bank, SVB was seen as a stabilizing force. But the latest financial moves are raising alarm bells among the firm’s client base.
“Psychologically, it’s a problem because everyone realizes how fragile things are,” says Scott Orn, general manager of Cruise Consulting, a tax, accounting and HR services startup.
Orn called SVB the “crown jewel of Silicon Valley” and a “robust franchise” that expects to survive these tough times and even be bought by a big bank. For hundreds of its customers, the return at SVB makes borrowing money more expensive.
“Losing a major debt provider in the venture debt market can increase the cost of financing,” Orn said.
According to SVB’s mid-quarter update, one of the problems the bank is facing is related to the amount of money its customers spend. As cash burn continues at a rapid pace, total customer funds have fallen for the past five quarters despite a slowdown in venture capital investment.
“Client cash burn is ~2x higher than pre-2021 levels and has not adjusted to the low fundraising environment,” SVB said.
In January, SVB expected average deposits for the first quarter to be between $171 billion and $175 billion. That forecast has now been lowered to $167 billion to $169 billion. SVB expects its clients to continue their cash burn in the last quarter of 2022, when economic consolidation was at its best.
“Companies have not gradually adjusted to the fundraising environment,” analysts at DA Davidson wrote in a report on Thursday. The firm has a neutral rating on the stock and said “the slow pace of recovery in the VC environment has led us to remain cautious on SIVB shares.”
S&P downgraded SVB to BBB- from BBB, one notch above junk. On Wednesday, Moody’s downgraded SVB to Baa1 from A3, citing “deterioration in the bank’s funding, balance sheet and profitability, which prompted SVB to announce measures to restructure its balance sheet.”
Threat quickly turned into potential contagion. Will the bank’s recognized opportunities cause customers to pull out their money and put it elsewhere? That question was circulating among investors and technology experts on Thursday, though, after CEO Greg Baker wrote in a letter to shareholders that the bank has “sufficient liquidity and flexibility to manage our liquidity position.”
“More in the VC community need to speak publicly to quell the panic about @SVB_Financial.” Mark Suster of Upfront Ventures He wrote On Twitter. “I believe their CEO said they are solvent and will not breach any bank ratio. & The goal was to increase and strengthen the balance.
Suster funds risk-taking and future-oriented operations that rely on SVB for banking services.
In the case studies section of the company’s website, for example, SVB highlights a loan for solar panel supplier Sunrun, a debt offering for an autonomous building materials supplier, and financing solutions for ocean drone startup Saildrone.
SVB’s loan losses are low, which means, at least for now, that the bank is not facing the same credit challenges it did during the dot-com crash and financial crisis, when defaults soared. Instead, analysts focus on the deposit in the house.
“Finally under pressure in their end markets, especially after peak client cash burn, SIVB is seeing client funds flow on and off the balance sheet,” analysts at Wedbush wrote. Rating on stock. That recommendation is “based on exceptional SIVB growth from 2020-2021 and our belief that the VC market will remain challenging for the next couple of quarters.”
Modi’s downgrade pointed specifically to the bank’s risk exposure, noting that “the balance of shareholder and creditor interests poses higher than average governance challenges.”
SVB still manages to find reasons for optimism. In a section of the report titled “Continued Underlying Momentum,” the bank posted a record high in private equity and venture capital dry powder in January, an indication that there is plenty of money available for startups.
One can only hope that SVB will eventually remain a reliable source of financing for companies looking to stockpile a good portion of that money.
See: Why SVB is not the canary in the coal mine for regional banks