The failure of Silicon Valley Bank (SVB) on March 10 has thrown tech startups into turmoil and left many wondering where future investment will come from.
Regulators closed the bank after days of turmoil after it announced it would need to raise US$2 billion to cover its debt from rising interest rates. This led to a bank crackdown as several big venture capital firms advised their clients to withdraw their funds.
SVB was known for funding technology start-ups. Being in Silicon Valley, part of the San Francisco Bay Area in northern California, meant many of these were green energy or biotech companies.
The post-collapse situation was “utterly terrifying,” says Ethan Cohen-Cole, chief executive of Capture6, a Berkeley, Calif.-based clean-tech startup. Capture6 develops a way to capture carbon dioxide directly from the air “Your first thought is, ‘This is the end of your business.'”
But on March 12, the U.S. government reassured former customers by announcing that it would guarantee bank deposits. Cohen-Cole, though relieved, doesn’t think this was necessarily the right thing to do to secure long-term investment in companies like his. “They are prolonging the problem,” he says. The bailout plan covers pressing cash flow issues such as employee payments, but next steps remain unclear, he said, noting that the government has stepped up its existing lending program for small businesses. Cohen-Cole predicts that investors will start to invest less in small companies, and this is likely due to small start-ups working on climate solutions. Business impact is inevitable.
HSBC buyout
In the UK, events play out a little differently. On March 10, the Bank of England announced that SVB’s UK arm would be liquidated. This represents a catastrophic loss for SVB’s customers. But after a frenetic weekend of lobbying and debate by the country’s technical leaders, by March 13, his SVB operations there had been bailed out by his HSBC bank. HSBC Bank bought his SVB UK for £1 ($1.20) allowing all banking operations to continue as before. .
Sebastian Weidt, chief executive of Brighton-based quantum computing startup Universal Quantum, who had millions of pounds deposited with SVB UK, said he had had a very stressful weekend. . “We had to work under the premise that we were running out of money, which meant we had to find a way to recapitalize Universal Quantum,” he says. The company was in the fortunate position of having a revenue stream after securing his €67 million ($72 million) deal with Cologne-based German Aerospace Center (although once HSBC stepped in, These funds are no longer needed).
Samira Ann Kassim, co-founder of Pink Salt Ventures in London, which invests in early-stage, women-led tech companies, has accounts in multiple banks to avoid such a situation in the future. I advise companies to “That’s the only risk protection you can take,” she says, adding that early-stage startups would have been hit hardest if the UK government and her HSBC hadn’t brokered the deal. she added. “It could have been years of complete turmoil.”
Aileen Ryan, chief executive of Preoptima, a UK-based start-up that develops design tools to reduce the carbon footprint of new buildings, has announced a partnership with SVB UK under new ownership. He said he plans to continue banking. However, she intends to spread her funds across many banks in the future.
wider problem
Matt Lilly, head of London’s Hult Business School, says the SVB’s collapse illustrates the problems facing the broader financial environment. “The environment is getting tougher for venture capital funding,” he says. “In my opinion [the collapse] It is an effect, not a cause, and the broader cause is rising interest rates. He predicts that even without SVB, decarbonizing start-ups will continue to attract investment in the US due to the US government’s Inflation Reduction Act, which encourages investment in clean technology.
Nonetheless, climate-tech entrepreneurs remain nervous, says Cohen-Cole. “The SVB’s lending capacity could be displaced by other institutions, but the potential reduction in broad lending could be damaging. Unfortunately, the SVB is a special case and the climate It was not reflective of the technology sector or the economy at large, and as a result, we are confident that other capital providers will eventually realize this uniqueness and quickly seek to replace SVB’s financing.”
This article is reproduced with permission and was first published on March 14, 2023.
