The global tech community is currently under a dark cloud following the collapse of Silicon Valley Bank and its being shut down and put under the control of regulators. This is a moment that will remind many of the 2008 financial crisis, which was also triggered by the banking system.
The technology startup sector will be adversely affected by these developments.
How did things reach this point?
Last week, on Thursday, shares of SVB Financial Group nosedived, falling more than 60% as the tech-focused bank attempted to shore up its balance sheet, igniting fears about its liquidity. This led to the bank's trades being halted several times on the stock market, with some of the largest venture capital firms subsequently advising portfolio companies to move their money out of the bank.
On Thursday, shares closed at $106.04 (R1933), down from a close of $267.83 on Wednesday and a 52-week high of $597.16. This was a significant drop for the bank, which resulted in its market cap falling below $6.25 billion, catching many investors and customers off guard.
What started it all was an announcement by the bank that it wanted to raise $2.25bn via a stock sale and investments in order to strengthen its balance sheet, as deposits from startups struggling for funding had dropped in recent months. To achieve that, the bank sold $1.75bn worth of its available-for-sale securities. In addition, equity fund General Atlantic committed to invest $500 million in the bank. That triggered panic among investors.
If this was just another bank, it would probably have less impact. Silicon Valley Bank, however, is not just any other financial institution; it is the financial partner of nearly half of the US’s venture-backed startups in the healthcare and technology space that went public last year. This bank serves as the lifeblood for tech startups.
Those companies are working through their cash reserves at a tremendous rate right now, while ongoing higher interest rates have made many venture companies hesitant to give more. For these companies it may be difficult to get their cash back, at least not with the necessary speed.
The fall of this bank will not only be felt in the US, but in far-flung places that had companies operating in the US. Dozens of startups, beyond the US, backed by the likes of YCombinator, Accel, Sequoia , Lightspeed, SoftBank and Bessemer Venture Partners, banked with Silicon Valley Bank – sometimes as their only banking partner – and couldn’t take out the money on time.
It is understood that almost all Indian SaaS startups with a large presence in the US, banked with Silicon Valley Bank. Over a dozen Indian SaaS unicorns have their headquarters in the US. A number of African tech startups that made it to the US are also banking with Silicon Valley Bank.
As this drama unfolds, tech companies are also completing the process of cutting staff across the industry. This development will lead to another round of lay-offs that will dampen the spirit of innovation.
Besides tech lay-offs, the tech sector is also recovering from the Sam Bankman-Fried fiasco, which affected the fintech sector. To prevent collateral damage, the US government will have to act and protect jobs. Foreign companies that operate in the US will have to seek their own government’s support.
The tech sector will have to reflect about its financial structure and governance to prevent future and similar developments.
Wesley Diphoko is the editor-in-chief of Fast Company (SA) magazine.