[spoiler: one of these reasons is specific to the Dutch startup landscape]
“This is an extinction-level event for startups and will set startups and innovation back by 10 years or more.” (source: Garry Tan, President of Ycombinator (1)).
According to SVB’s own financial data, it banked 44% of 2022’s venture-backed tech and healthcare IPOs (2) and 55% in 2021. While it is best known as a bank for startups, 56% of its loans (at the end of 2022) were actually to VC and private equity firms, usually secured by their limited partner commitments.
That was the potential impact.
However, the U.S. government stepped in last Sunday and safeguarded account holders’ deposits at SVB.
SVB’s customers withdrew $42 billion from their accounts last Thursday. That’s $4.2 billion an hour, or more than $1 million per second for ten hours straight (3).
Consequently, SVB defaulted and the FDIC stepped in and closed the bank on Friday, March 9th (4). The next day, on our side of the ocean, the Bank of England stepped in and took control of SVB’s UK Branch (5).
And that was the pace at which events unfolded.
Within two days, a bank that, only days before, had made Forbes magazine’s annual ranking of the best banks in America.
Although markets appear to be staging a quick recovery after this sudden upheaval, there are certainly lessons to be learned and actions that should be taken:
- Cash is king. If the events of the last couple of days have taught us anything it is that developments moved at a very fast pace and liquidity issues were the first major concern. From the first rumors on Thursday until well into Friday, startups and investment funds were scrambling to transfer their funds and savings out of SVB and into other banks. SVB clients had serious trouble meeting their payroll obligations. Some startups that banked with SVB would have to pay employees as soon as last Tuesday. Board directors (who are frequently VCs who have backed the company) could also be held liable for these obligations.
Two blockages prevented many boards from taking the necessary steps in time:
1. Not having secondary bank accounts available at other banks that were not affected by the bank run;
2. Not being able to get the mandates and approvals required from shareholders and other stakeholders to transfer such amounts at a moment’s notice (6).Two constraints that would have been catastrophic for all those involved if the US Government (and the Bank of England) had not stepped in. An extinction-level event indeed, where a quick response was not always possible due to a slow decision-making process.
- The operational impact. Which of your critical (third-party) processes could have been affected by this? Silicon Valley Bank was a very important component within the startup and technology ecosystem. The list of companies affected directly or indirectly by its collapse will be significant. Such an event puts startups and scaleups at risk of not being able to raise sufficient (venture) capital to keep their businesses going. This could cause a chain reaction throughout the start-up landscape, where third-party technologies are more intertwined than ever.
- Funding. If you are raising money or planning to raise money in the near future, this week’s (funding) landscape may very well not be the same as last week’s (which wasn’t too bright to start with). “The Silicon Valley Bank failure raises fears of broader financial contagion” (7). The default of SVB could have had an immediate impact on the thousands of investment funds using SVB as their main bank (8). Though a total disaster was averted at the last moment, it will certainly create further uncertainty in the fundraising market
- The Dutch finance landscape was directly impacted already. Before the default, SVB was looking into entering the Dutch market. According to Rinke Zonneveld, the CEO of Invest-NL (9), talks were ongoing with SVB for collaboration between InvestNL and SVB to start investing in the EU and Dutch startup landscape specifically. Money that will now no longer be making its way into the Dutch market. Simultaneously, it will also become more challenging for Dutch companies planning to expand to the US “Raising money was already challenging in the US, it will become even more difficult now.” (10)
- Never waste a good crisis. What are your opportunities here? Whether you’re Fintech, Regtech or any other startup or scaleup, where do your opportunities lie? As with the collapse of Lehman Brothers, we may well remember this bank run on SVB as a watershed event for the startup and venture capital investor market. Alternative banking solutions, risk monitoring solutions, and payroll providers (11) will thrive in the post-era of the SVB collapse.
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If you find making faster and better decisions together with your board and keeping them informed at the same time challenging, please feel free to reach out to Govin. Govin’s corporate governance platform enables you and your board to deal with the red tape surrounding your decision-making process in a highly efficient manner. Ensuring that all decisions are taken in accordance with your articles of association, shareholders’ agreements, and other relevant documentation. In addition, Govin provides a complete record of all resolutions. This way, you can get on with your (crisis) management and rest assured that you are in compliance where corporate governance is concerned.
