Silicon Valley Bank’s collapse created a weekend of stress for the startup community. There has been a lot of speculation about how big an impact it might have, with some suggesting that as many as 60% of startups had all or most of their money tied up in the bank.
And while, in the UK at least, there has been a speedy rescue, with HSBC buying the remnants of the UK arm, there will still be impacts on both the tech and financial sectors.
A classic run on the bank
While the post-mortem audit will take some time, it already seems clear that the bank’s failure was a result of not managing its liquidity. Dr Amber Ghaddar, who founded The200BnClub with Bridget Greenwood, pointed to changes in bank regulation that made the collapse possible. “Trump-era deregulation of banks means that SVB was not considered systemic any more. It was not required to calculate and report the Liquidity Coverage Ratio, the Net Stage Funding Ratio, or to take part in stress tests,” said Ghaddar.
The result was that it was able to invest a significant part of its cash, or more accurately its clients’ cash, in low-yield investments. A wise move when interest rates were low, but when rates rose — as many expected they would — it tied up the cash SVB’s clients wanted back. “There was little-to-no interest rate hedging at SVB. Which is worrying in a rising-rate environment,” Ghaddar added. And when you have a close-knit client base, word of problems spread quickly. SVB’s attempt to raise capital by selling its investments at a loss added fuel to the fire, creating something close to a classic run on the bank.
A victory for British regulation?
Although looser US regulations enabled the collapse, it could be argued the UK managed the issue well. The Bank of England had learned the lessons of the 2008-10 crash, when loosening regulations (including their own regulatory powers) in the early 2000s played a role. Although it issued a statement stating there would be no bail-out, it was working behind the scenes, along with the Treasury, to secure the HSBC takeover of SVB’s UK operation.
Caroline Plumb, CEO of Gravita, was one of many that welcomed the efforts made. “After a whirlwind weekend, the fears of many tech founders will be put to rest by this acquisition,” she said. “Affected startups can proceed with plans for growth and contribute to the recovery of the wider UK economy.”
Daniel Harman, co-founder and CEO of alternative investment fintech, Dark Square Capital, echoed Plumb’s observations. “I’m glad it was a private acquisition, he said. “That’s a really positive signal for the fintech and tech sectors generally. If government intervention was required, I think it would have had knock-on effects spanning years and really hit confidence in the sector.”
Harman also said that, so far, wider fears were unfounded. “Some people are drawing parallels to 2008, but it’s important to note that, so far, this was a one-off issue,” he said. “The fact that it was resolved so quickly should really calm fears about knock-on effects and how similar situations will be handled in future.”
The consequences of collapse
However, although many will be pleased that something approaching normal operation could be resumed after the weekend, the collapse will not be entirely without consequences. The200BnClub’s Bridget Greenwood noted that behaviour is already changing. “The most immediate consequence has been diversification of treasury management,” Greenwood notes. “Many VC firms within our network have begun to explore treasury management solutions that allow them to hold their cash in different banks, in order to minimise their risk exposure.” This will, however, create additional costs for VC firms and startups.
Gravita’s Plumb highlighted the other risks to the sector, calling on the Chancellor to further demonstrate support in his 2023 budget statement. “If the Government is to deliver on its pledge to make the UK a ‘science superpower’, protecting R&D tax credits is vital,” she said. And, she continued, if tax credits do go, then something else will be needed. “The Chancellor simply must offer up other policies to encourage small businesses to invest in R&D if the planned cuts go ahead.”
Others also highlighted the need for the rest of the banking sector to be more startup friends. Triple Point Ventures’ Investment Director, Seb Wallace, noted that for some, exposure to the SVB’s risk was because they had a lack of choice. “Many startups find it difficult to open new bank accounts,” he said. “Hopefully, high street banks in the UK will soon become more pragmatic and understanding of startups. That will enable startups to open more than just one or two bank accounts.”
But after a few days of stress, it appears there may be one winner from the process: HSBC. Aside from gaining all of SVB’s clients for just £1, they may also have established themselves as the startup’s bank of choice, suggests Dark Square Capital’s Harman: “I think this paints HSBC in a really good light. All major banks are making a push to be more ‘fintech friendly’ and the market is crowded. HSBC have put their money where their mouth is and are probably now the dominant bank for start-ups in Europe as a result.”
