Silicon Valley Bank Struggles Raise Concerns for the Tech Startup Market

Silicon Valley Bank has long been considered a vital institution for tech startups, providing traditional banking services while funding projects and companies deemed too risky for traditional lenders. However, the bank's intimate ties to technology make it particularly sensitive to the industry's boom-and-bust cycles, and on Thursday, those risks became abundantly clear.

SVB's Struggles And Losses

SVB was forced into a fire sale of its securities, unloading $21 billion worth of its holdings at a $1.8 billion loss while also raising $500 million from venture firm General Atlantic, according to a financial update late Wednesday. After its stock soared 75% in the 2021 market rally, SVB lost two-thirds of its value last year and then plummeted another 60% during regular trading on Thursday and an additional 22% after the close.

The State of the Tech Startup Market

For the Silicon Valley region, the troubles land at a particularly difficult time. Venture capital deal activity sank over 30% last year to $238 billion, according to PitchBook. While that's still a historically high number, the dearth of initial public offerings and continuing drawdown in valuations among once highfliers suggests that there's much more pain to come in 2023.

As a large regulated bank, SVB has been viewed as a stabilizing force. But its latest financial maneuvers are raising alarm bells among the firm's client base. Losing a major debt provider in the venture debt market could drive the cost of funds up, and this would likely make it more expensive for startups to borrow money.

Silicon Valley Bank Told Some Customers Money Transfers Are 'Backed Up

SVB's Client Funds Problem

According to SVB's mid-quarter update, one of the primary problems the bank faces has to do with the amount of money its customers are spending. Total client funds have fallen for the last five quarters, as cash burn has continued at a rapid pace despite the slowdown in venture investing. Client cash burn remains ~2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment.

Analysts' Concerns

Analysts at DA Davidson wrote in a report on Thursday that in terms of spending, "companies have not adjusted to the slower fundraising environment." The firm has a neutral rating on the stock and said concerns "over a slow to recover VC environment have kept us cautious on SIVB shares."

S&P and Moody's Ratings Downgrade

S&P lowered its rating on SVB to BBB- from BBB, leaving it just one notch above its junk rating. On Wednesday, Moody's reduced SVB to Baa1 from A3, reflecting "the deterioration in the bank's funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet."

Contagion Effect and Future Outlook

Concern has quickly turned to the potential contagion effect. Does the bank's acknowledged misfortunes lead clients to pull their money and house it elsewhere? That question was circling among investors and tech execs on Thursday, even after CEO Greg Becker wrote in a letter to shareholders that the bank has "ample liquidity and flexibility to manage our liquidity position."

While SVB's loan losses remain low, analysts are focused on the deposit side of the house. Silicon Valley Bank remains a crown jewel of Silicon Valley and a strong franchise that many expect to survive this difficult period and potentially get acquired by a bigger bank. However, the struggles of the bank have raised concerns about.

Silicon Valley Bank Struggles Raise Concerns for the Tech Startup Market

SVB's Struggles And Losses

The State of the Tech Startup Market

SVB's Client Funds Problem

Analysts' Concerns

S&P and Moody's Ratings Downgrade

Contagion Effect and Future Outlook

Mosytee

Đăng nhận xét

#buttons=(Accept !) #days=(20)

Contact form