What happened to Silicon Valley Bank?
A bank for startups
It is not really necessary to have a purely startup-focused bank for startups to use - but the now collapsed Silicon Valley Bank (SVB) specialised as a lender for tech startup companies.
So why did it attract startups? It could come down to the specialised services offered by SVB: the structure and business requirements of startups are
somewhat different from those of 'normal' businesses. There's also a potential cultural explanation. Startups do not usually have the same
infrastructure or - perhaps more importantly - attitude to risk and compliance as
more established companies and SVB may have become more comfortable with that
than other banks. From the opposite perspective, as SVB began to do more
business with the tech sector and built up a reputation as being more startup
friendly, they may also have become more appealing to the startups. More
cynically, given the group-think nature of venture capital investing, it is seemingly inevitable that they would all have ended up using the same bank (and then that
they all tried to run at the same time).
Safe keeping of large sums of deposits is particularly important for startups as they are often 'pre-product' and so have limited or no ongoing revenue streams. Many other businesses will (hopefully) have sales or other recurring revenues that they can use to meet obligations, and so they generally do not need to retain so much cash on hand.
Startups, on the
other hand, tend to receive the bulk of their funding in
sizeable chunks at irregular intervals as and when they do a funding round.
Given their lack of a steady income stream and inherent riskiness, it can be difficult for them to borrow when needed. As a result, in order to be able
to make payroll and other expenses each month, they need to store potentially
significant sums of money for long periods between funding rounds. In addition,
startups are unlikely to have an internal treasury department that could
directly manage their corporate cash holdings by investing in commercial paper
or treasury bills, in the way that larger established companies do.
The HSBC bailout
It is difficult to say what would have happened if HSBC didn't step in. Much would have depended on how quickly SVB could have been resolved and whether uninsured depositors would have had to take a haircut. In the short-term, without access to their deposits, many startups would have found it difficult to make payroll and meet expenses. Exacerbated by the challenging financial environment for tech and startups and given the market correction and increasing interest rates, it probably would have made it more difficult for startups to borrow short-term to meet any funding gaps. This could have led to a negative spiral - as some startups got into difficulties, this would have increased the uncertainty in the sector as employees and vendors worried about whether they would be paid, and this uncertainty would put more pressure on the startups and discourage further investment in the sector, further exacerbating the situation.
Learning our lesson
One major lesson concerns risk concentration. In terms of financial stability, it may be better to spread tech deposits among a larger number of banks rather than to concentrate them in a handful of specialists.
First, since SVB was so exposed to tech startups in terms of its liabilities, if there were tech specific issues causing many startups to want to withdraw their deposits, then this would be more likely to trigger a bank run. If SVB had had a more diversified depositor base, there would have been less chance of them all needing to withdraw their deposits at once (especially if many of them were retail depositors with less than $250k as this would have been FDIC-insured). Of course, once the possibility of a bank run has been raised, it can become a self-fulfilling prophecy for any bank. The same logic would also apply to any other sector.
The analysis of SVB has focused on the impact of increasing interest rates on the asset side of SVB's balance sheet - as interest rates increase, the market value of medium and long-dated bonds falls and, when SVB had to mark these to market, this raised concerns about their solvency. At the same time, the liability side of SVB's balance sheet was indirectly exposed to interest rate risk - generous funding for startups and high valuations are generally associated with periods of easy money - when rates began to increase, there were fewer new funding rounds bringing new money into SVB and the startups began to draw down their deposits, putting pressure on SVB's balance sheet.