As the boss of three healthcare start-ups in three decades, Bill Hunter considered many risks in his career. His failing corporate bank was not one of them.
As Silicon Valley Bank (SVB) struggled to raise capital or find a buyer last week, Hunter was on a flight from Las Vegas to Vancouver, Canada. By the time it landed three hours later, SVB had been shut down and taken over by US regulators after what was described as the first bank run fueled by Twitter.
The collapse, the biggest bank failure in the United States since the 2008 financial crisis, sent shockwaves through the technology sector, which SVB had been handling for four decades.
As the U.S. federal government has stepped in to ensure its customers have access to their full deposits, entrepreneurs fear the bank’s collapse will leave a big void and the cash needed to fund their businesses will run out. dry up.
Founded in 1983, SVB had established itself as the essential lender for American start-ups considered too risky by more traditional banks. As of last year, it has done business with nearly half of all venture capital-backed technology and life sciences companies in the United States.
“These guys specifically focused on emerging small businesses, and they were the heavy hitter in that space,” Hunter told Euronews Next.
“There are little ones here and there, but they had the widest range. So it’s a blow, and it’s going to have an impact for a while ”.
A special bank
The life sciences and healthcare industry relied heavily on SVB, with around 12% of the bank’s $173 billion (€161 billion) in deposits belonging to companies in that sector.
Nine out of 10 start-ups fail within 10 years, and pharma and health tech in particular are inherently risky businesses. So when founders are looking for people to put their faith and money into their ideas, things can get tricky.
With his previous start-up, a specialty pharmaceutical company in Switzerland, Hunter said he struggled with just opening a corporate bank account.
“A lot of banks don’t want your money, even a decent amount of money. With 25-30 million dollars [€23-28 million], you would think: no problem opening a bank account. You’d be surprised, he said.
“You don’t make any money when you start, so you’re constantly tapping, you’re not adding anything. I just don’t need that hassle.’
This is where having SVB made a real difference; by providing young entrepreneurs with a bank account and valuable support to get started, hire a team, set up a payroll and dream big.
SVB lent money to these founders, including when their businesses were not yet cash positive, and helped them raise equity early on.
“They were sort of the central bank that connected venture capitalists to entrepreneurs. This is where you want to go. If you’re trying to raise money and want to attend a conference and meet 100 investors, not five investors, this is the place to go,” Hunter said.
Funding gap
The irony of the collapse of tech’s beloved bank is that it was largely fueled by technology itself – digital banking making money transfers much easier to panic on social media and in private WhatsApp chat groups.
SVB customers withdrew $42 billion (€39 billion) in a single day last week, leaving the bank nearly $1 billion (€930 million) in a negative cash balance, according to A regulatory filing.
Many entrepreneurs said the bank’s struggles posed an existential threat to their own business – the one they had worked so hard to build – and they were terrified of not being able to pay their staff and their bills.
“I was shocked. My sister’s bank was SVB, she had about 2 million dollars (1.9 million euros). She was very worried, I helped her open another bank account this weekend. end,” said Ke Cheng, Founder and President of HistoWiz, a biotech company that automates tissue sample processing and digitization for the pharmaceutical and academic industries.
Since her own company’s deposits were mostly safe outside of SVB, Cheng turned to LinkedIn to offer help to affected start-ups in her area of Miami.
She explained that at the height of the COVID-19 pandemic, the Trump administration’s unique Paycheck Protection Program saved her profitable business, and now was “the time to give back to the local community and preserve innovation in the American economy.” .
Hunter, whose medical technology company Canary Medical had about $5 million (46 million euros) of cash exposed to SVB, was of course relieved when US regulators announced that all deposits at SVB would be guaranteed. But it is uncomfortable to see a precious partner fall.
“Yes, we have access to our capital and that’s very good. But, you know, we didn’t just do business with them. We are currently working on different M&A transactions, and they were providing those services to us as well,” he said.
“So the money is one thing, but the services and the other things – those will be missed out if there’s not a way to sustain them.”
Cheng said she hoped the U.S. government could still “somehow encourage these local and smaller startup-friendly banks to continue,” as she was very concerned about the prospects for early funding from the venture capital into health tech start-ups this year.
“I think VCs will be very careful writing checks now. Due to rising interest rates and crypto fallout, I’m sure people are pretty scared to put money into startups,” she said.
“High reward requires high risk”
At this time, it is unclear whether any institution can or will fill the void left by SVB in funding start-ups.
“There are other banks that offer these services, don’t get me wrong. But it was the 800-pound gorilla of the banks that did this,” Hunter said. “So I’m sure over time one of the other companies will emerge to take that space. But it will take time. It won’t be in a year or two.”
A partner from a rival European venture capital provider told Euronews Next that SVB had done “tremendous work serving the tech and healthcare ecosystem”, including in Europe where it has been active for around 15 years old.
“It’s of course very unfortunate that a player of such stature should go. Obviously that leaves a funding gap,” said the partner, who asked not to be identified as his company was collaborating and was in competition with SVB on the mainland.
He welcomed the UK Government’s swift action to secure a deal HSBC takes over the UK arm of SVB in a bid to protect the country’s tech sector from a cash flow crisis.
“I think on both sides of the Atlantic there is a realization that the technology and health ecosystem is fundamental to the growth economy and fundamental to the survival of the global economy,” said the partner.
“They had to do everything they could to make sure the ecosystem survived and wasn’t affected by one bank’s problems. But it remains to be seen how they will continue to provide funding.”
‘Live by the sword, die by the sword’
In a way, the collapse could put the US tech sector on a par with the European tech sector, which experts say has no real equivalent to SVB in terms of scale or specialization. .
In the EU, banks of this size are generally more diverse and tightly regulated than in the US, and there is also often a home bias at play, with German companies, for example, doing business more easily with companies like Deutsche Bank.
“The advantages of the European and Canadian system are that capital is more dispersed and risk-taking more measured. The downside is that high reward requires high risk,” Hunter said.
“Americans have always embraced risk and pushed boundaries. And no place on Earth for the past 30 years was more obvious than Silicon Valley, right? So I guess it’s a bit like ‘live by the sword, die by the sword’.
“We [in Canada and Europe] take a more cautious approach and our businesses tend to emerge more slowly and not reach the top as quickly. The Americans are taking a much more aggressive approach and they seem to be incubating more successful companies,” he added.
But on both sides of the Atlantic, entrepreneurs and tech funders are feeling nervous.
SVB’s collapse is likely to further scare investors who had already become “a bit more pessimistic about technology, about start-ups, about innovation” in recent months, said Antonio Fatas, an economics professor at INSEAD in France.
“I just think things are going to be more difficult. The funding is definitely going to get a little more conservative,” he said.