Does SVB collapse signal doom and gloom for start-ups?

The collapse of the California-based Silicon Valley Bank over the weekend spooked markets in the US and beyond, sparking fears of a global financial crash.  

Besides the technology-focused bank SVB, two other important banks — Silvergate and Signature — enabling cryptocurrency operations also announced wind-down of their operations.

The back-to-back bank collapses caused global financial stocks to lose $465 billion in market value in only two days.

Several banks and holdings have fallen by at least 10 percent. European banking shares also dropped sharply after the SVB fallout. 

One of the biggest sectors feared hit by the collapse is start-up companies. Investors say start-ups could face issues accessing funds and credit lines to pay their employees, which may lead to tightening their belts.

In an extraordinary move, the US government stepped in to stop the bleeding in the financial markets, protect small businesses, and ensure depositors that they would get back every penny in their bank accounts.

But it failed to stop crowds from waiting for hours in front of SVB branches across the US to withdraw their money, despite an announcement that government insurance will cover accounts up to $250,000. 

It all began on March 8 when SVB announced that it needed to raise about $2.5 billion to shore up its balance sheet, which was dwarfed by Federal Reserve interest rates. As the news spread, the bank’s clients began to withdraw their deposits — about $42 billion — leading to the catastrophic meltdown. 

Prominent bank for start-ups

The collapse of SVB, the 16th largest bank in the US and a prominent lender to start-up companies and venture capital firms, has been recorded as the worst in US financial history after the shuttering of Washington Mutual, the largest savings and loan association, in the 2008 global economic crisis.

Over 5,000 start-up chief executives and founders, including cloud storage company Dropbox, signed a petition appealing directly to Treasury Secretary Janet Yellen and other officials to provide relief as they warned more than 100,000 jobs could be at risk.

Representing 400,000 employees, they asked small business depositors at the bank to be made whole and requested regulators to conduct a backstop of depositors.

SVB was crucial for start-ups as it allowed easy access to funds.

It allowed Chinese start-up companies to open an account using just a mobile number verification, according to a report, in which a start-up founder who requested anonymity stated they once had tens of millions of US dollars at the bank.

Several Indian start-ups’ money is also stuck in the bank, and they are looking for a way to get their money out of it.

SVB was also popular among venture capitalists as the bank was letting investors see and approve how the start-ups used their funds, the report underlined.

According to official figures, SVB had around $209 billion in total assets— up from $60 billion in 2020, and two years later, it had about $175 billion in deposits.

Potential massive layoffs

Not too long ago, most major tech giants such as Apple, Microsoft, Meta, and Google announced massive layoffs in their companies.

The Biden administration has announced precautions to prevent further bank failures, but if the measures don’t work, other start-up employees could face the same fate. 

Business people in the US are voicing concerns that another wave of layoffs could lead to financial contagion, as white-collar jobs are already seeing a recession.

Andrew Yang, an entrepreneur who ran for the White House in 2020, has called on the government to prevent “thousands of mass layoffs and defunct companies” which would create “a wiped out generation of start-ups."

The bigger, the safer

Another concern is the way customers of smaller banks react to the crisis. 

In an attempt to prevent another SVB-like fallout, venture capital firms could act more conservatively and may not raise their investments in such banks, or they may not invest at all.

According to a Financial Times report, many small businesses and bigger depositors have already shifted their assets to bigger banks thinking they are more secure, in a trend that could ultimately lead to the closure of smaller banks.

Signs indicate that SVB collapse could deal a major blow to the country’s banking system, as American banks are already sitting on $620 billion in unrealised losses.