Silicon Valley Bank has long been considered the lifeblood for tech startups, providing traditional banking services while funding projects and corporations deemed too dangerous for traditional lenders. Billions of dollars in enterprise capital flow into and out of the bank’s coffers.
However the 40-year-old firm’s intimate ties to technology leave it particularly sensitive to the industry’s boom-and-bust cycles, and on Thursday those risks became abundantly clear.
SVB was forced into a hearth sale of its securities, unloading $21 billion price its holdings at a $1.8 billion loss, while also raising $500 million from enterprise firm General Atlantic, based on a financial update late Wednesday. After its stock soared 75% within the 2021 market rally, SVB lost two-thirds of its value last yr after which plummeted one other 60% during regular trading on Thursday and an extra 22% after the close.
For the Silicon Valley region, the troubles land at a very difficult time. Enterprise capital deal activity sank over 30% last yr to $238 billion, based on PitchBook. While that is still a historically high number, the dearth of initial public offerings and continuing drawdown in valuations amongst once highfliers suggests that there is way more pain to are available 2023.
Signage for high-tech business bank Silicon Valley Bank, on Sand Hill Road within the Silicon Valley town of Menlo Park, California, August 25, 2016.
Smith Collection | Gado | Archive Photos | Getty Images
As a big regulated bank, SVB has been viewed as a stabilizing force. But its latest financial maneuvers are raising alarm bells among the many firm’s client base.
“Psychologically, it is a blow because everyone realizes how fragile things will be,” said Scott Orn, operating chief at Kruze Consulting, which helps startups with tax, accounting and human resources services.
Orn called SVB a “crown jewel of Silicon Valley” and a “strong franchise” that he expects to survive this difficult period and even potentially get acquired by an even bigger bank. For his customers, which number within the tons of, a pullback by SVB would likely make it costlier to borrow money.
“Losing a significant debt provider within the enterprise debt market could drive the price of funds up,” Orn said.
In line with SVB’s mid-quarter update, one in every of the first problems the bank faces has to do with the sum of money its customers are spending. Total client funds have fallen for the last five quarters, as money burn has continued at a rapid pace despite the slowdown in enterprise investing.
“Client money burn stays ~2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment,” SVB said.
In January, SVB expected average deposits for the primary quarter to be $171 billion to $175 billion. That forecast is now right down to $167 billion to $169 billion. SVB anticipates clients will proceed to burn money at essentially the identical level as they did within the last quarter of 2022, when economic tightening was already well underway.
Analysts at DA Davidson wrote in a report on Thursday that by way of spending, “corporations haven’t adjusted to the slower fundraising environment.” The firm has a neutral rating on the stock and said concerns “over a slow to get well VC environment have kept us cautious on SIVB shares.”
S&P lowered its rating on SVB to BBB- from BBB, leaving it only one notch above its junk rating. On Wednesday, Moody’s reduced SVB to Baa1 from A3, reflecting “the deterioration within the bank’s funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet.”
Concern has quickly turned to the potential contagion effect. Does the bank’s acknowledged misfortunes lead clients to tug their money and house it elsewhere? That query was circling amongst investors and tech execs on Thursday, even after CEO Greg Becker wrote in a letter to shareholders that the bank has “ample liquidity and adaptability to administer our liquidity position.”
“More within the VC community must speak out publicly to quell the panic about @SVB_Financial,” Mark Suster of Upfront Ventures wrote on Twitter. “I think their CEO when he says they’re solvent and never in violation of any banking ratios & goal was to lift & strengthen balance sheet.”
Suster funds the sorts of risk-taking and future-oriented ventures that depend on SVB for banking services.
Within the case studies’ section of the firm’s website, for instance, SVB highlights a loan to solar panel provider Sunrun, debt offerings to autonomous construction equipment vendor Built Robotics and financing solutions for ocean drone startup Saildrone.
SVB’s loan losses remain low, meaning that a minimum of for now it is not facing the sort of credit challenges the bank handled in the course of the dot-com crash and financial crisis, when charge-offs soared. Somewhat, analysts are focused on the deposit side of the home.
“Given the pressure on their end markets, especially the elevated levels of client money burn, SIVB is seeing continued material outflows of client funds, each on- and off-balance sheet,” wrote analysts at Wedbush, who’ve the equivalent of a hold rating on the stock. That advice is “based on SIVB’s growth normalizing after an exceptional 2020-2021 and our belief that the VC market could remain challenged for the subsequent couple quarters.”
Moody’s downgrade specifically pointed to concerns concerning the bank’s risk profile, mentioning that the “balance of shareholder and creditor interests posed higher than average governance challenges.”
SVB still managed to search out reasons for optimism. In a bit of its report titled “Continued Underlying Momentum,” the bank noted that personal equity and enterprise capital dry powder hit a record high in January to the tune of $2.6 trillion, a sign that there is loads of money on the market for startups.
SVB can only hope that it stays a trusted financial source for corporations as they appear to eventually store chunk of that cash.
WATCH: Why SVB is not a canary within the coal mine for regional banks