Silicon Valley Bank Collapse Will Hurt Startup World, Despite Bailout

In the short term, regulators have found a solution for Silicon Valley Bank depositors and hopefully allayed fears of a broader run on regional banks. Now, the focus will shift to the longer-term crisis facing the global innovation finance system. America’s much-admired system of innovation production has just taken a beating, and the turmoil that led to the death of Silicon Valley Bank is not over.

We are here as two women working in tech and finance to call for a serious examination of the funding needs of today’s innovators – in the medium term as they struggle to survive the current turmoil, and term as they develop the innovations that drive economic growth.

Silicon Valley Bank, founded in 1983, was born at a time when Silicon Valley was synonymous with “technology” and “innovation”. This is no longer the case. Over the past 50 years, the technology community has evolved into a global system that supports many types of innovation. SVB was the crown jewel of the banking and venture capital industry, not just in Silicon Valley, but around the world.

Massive venture capital funds and $100 million California-based startups always attract attention, but investors and tech companies around the world are very different from that stereotype. They are primarily small business owners, who in turn are loyal employers and supporters of their communities.

Geographically, this community is widespread. In the Midwest, the former Rust Belt, and the American South, where Silicon Valley and its banking have been cited as an example, there are probably hundreds of companies and venture capital funds with accounts and loans in the bank, and many more in other medium-sized companies. banks. Small, specialty and mid-sized banks are often in a better position to offer small business owners financial products and introduce them to others who might be able to help them. They can also provide more industry-specific advice.

With a decline in overall venture capital funding, the simultaneous rise in interest rates, and the uncertainty of the current climate, the paths to growth and expansion for small businesses are darkening. The outlook today is challenging for tech entrepreneurs because their businesses are inherently risky to begin with. Market fluctuations can impact their journeys quickly and significantly.

What the tech startup community really looks like

Although the tech startups that get millions of dollars in funding are the ones that grab the headlines, the vast majority of tech companies operate on a shoestring budget. Collectively, they employ millions of people. Two years ago, researchers from the University of North Carolina and the National Venture Capital Association found 3.8 million employees at companies that received venture capital investments between 1990 and 2020 – 62, 5% of them were outside of California, Massachusetts and New York.

The startups and venture capital funds that we know personally in upstate New York and Massachusetts are depositors in SVB; these communities are a far cry from the more famous tech communities of Palo Alto or San Francisco.

Some 2,500 venture capitalists had accounts at the SVB. It’s easy to picture them as big companies, and a small handful of famous venture capital firms have hundreds of employees. But the median venture capital firm in the United States had $56 million in assets, according to the National Venture Capital Association, investing the money in startups on behalf of wealthy individuals and funds. This median size means that many companies have revenues under $1 million.

Angel investors and operators have also bet heavily on SVB; these operations – mostly sole proprietorships – are much smaller.

An unknown, but probably quite large percentage of Silicon Valley account holders are startups and venture capital funds in other countries’ tech markets, where tech startups are seen as integral to prosperity and of economic growth. Many venture capital funds and startups in emerging markets have trusted Silicon Valley Bank for their deposits and as a lender, confident that their money is in a well-regulated and credible economy. Yesterday the CEO of a company called Chipper Cash wrote about the importance of Silicon Valley Bank in his journey.

“A little known fact is that 5 years ago when I was trying to open Chipper’s first bank account, SVB was the only bank that accepted us. I know there are countless other startups doing all very important work who would say the same,” wrote CEO Ham Serunjogi. Chipper Cash makes it easy to send money across borders, working on the African continent.

Even further from Silicon Valley are tech communities in Egypt, the UK, Botswana, Kenya and Nigeria, places that are more dependent on technological innovation than ever before. There are also founders who are beginning to question the security of the American financial system. Easiness and quick action from the US government helped, but emerging market entrepreneurs now have fewer options in an already tight funding market.

Short term losses

SVB operated differently from a traditional bank. Focused on the tech industry, the bank was a place for entrepreneurs, and founders flocked to SVB for more than seed funding. The bank brought venture capitalists and entrepreneurs together, creating invisible but vital networks of human connection. He made quick turnarounds on mortgages; larger, more traditional banks are often reluctant to approve mortgages for even the most experienced contractors. Silicon Valley Bank employees have guided and mentored founding teams in growing companies, invested in startups, and supported venture capitalists who have partnered with them.

Techstars, one of the world’s largest pre-seed investors, has stakes in portfolio companies valued at $96 billion in market capitalization. The franchise has managers and founders who have done business exclusively with SVB. Y Combinator, a startup accelerator, said a third of startups exposed to Silicon Valley Bank use SVB as their only bank account. Both of these accelerator-investors likely used Silicon Bank because of its specialized tools, network, and knowledge.

In fact, countries around the world are trying to replicate the innovation infrastructure of the United States. According to recent reports, the government is still trying to find a buyer for key SVB units through an auction process. If significant elements of SVB are not placed under the wing of a larger institution with this specialized knowledge of technology and finance intact, the United States will have to support the reconstruction of something like this, if they hope to continue to produce innovation at a high level.

Long-term effects on innovation

The United States gained a head start in innovation beginning in the 1950s, when the US federal government invested money in research and development after the Soviet Union launched Sputnik. The result was the development of the silicon chip. Venture capital (and later, seed investing and angel investing) became an industry to provide the particular type of venture capital needed to fund people with ideas who were not necessarily experienced in the business management. This whole funding system is designed around the idea that because it’s so difficult to push an innovation to market, innovators need specialized help.

This type of funding has helped produce some very large companies, including Amazon and Microsoft. Although it advertised its role in the creation of large companies, SVB was also an important part of the financial system for deeper innovations. According to Crunchbase, about 12% of SVB’s assets were owned by biotech companies.

Funding and supporting risk takers wherever they are is essential for the United States to maintain its edge and, in turn, help other nations deeply invested in like-minded, like-minded goals. It goes without saying that there are other countries willing to take up the innovation torch. Rebuilding innovation funding will be part of that healthy competition, we hope.

The Ultimate Cost of Collapse

We are not writing to absolve the bank’s executives or the technology community of any responsibility in this situation. A few months ago, there were telltale signs that the bank’s assets were lagging liabilities. If there has been malfeasance or serious misjudgment at the bank, those responsible should be held accountable. The tech community should also focus on building a financial infrastructure that is resilient to changes in the economy. Volatility is a constant in today’s world.

We are encouraged that regulators believe the contagion from Silicon Valley Bank will not spread to the rest of the financial system. Regulators should also consider the signal they send to innovators and entrepreneurial people around the world. As of yesterday, SVB depositors received a safety net, a guarantee that the FDIC will allow them to continue operating their businesses, and an assurance that they will be cured.

But the damage to businesses and communities, as well as innovation ecosystems around the world, could continue to be severe, especially in an environment where the Federal Reserve continues to raise interest rates. The immediate banking crisis is over. Now is the time to rebuild a new innovation financing system to meet today’s needs. If the United States does not, it is likely that another country will.

—By Pia Sawhney, Partner and Chief Strategy Officer at Armory Square Ventures (ASV), a mission-driven technology venture capital firm based in New York’s Finger Lakes region; and Dina Sherif, executive director of the MIT Legatum Center for Entrepreneurship and Development. ASV and its portfolio companies did not have accounts at Silicon Valley Bank.