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By Jingwen on March 12, 2023
- SVB’s collapse not only marks the end of Silicon Valley’s wealth creation myth over the past 40 years, but the aftermath will also further affect the development of industries in India and China.
To this day, James Slavet, a partner at top Silicon Valley venture capital firm Greylock Partners, can still remember his first meeting with Silicon Valley Bank (SVB) staff. In 1986, Slavet had just joined Greylock Partners and “a senior SVB executive immediately reached out and said, ‘Hey, nice to meet you. Let me know if there’s anything I can do to help.’ I had never received this kind of treatment from any other institution,” he said.
SVB’s attitude towards James Slavet seems to epitomize the role it has played in the development of the US innovation industry over the past 40 years: an open and friendly partner.
In the past 40 years, no one can deny SVB’s enormous role in Silicon Valley and US technology development. It has provided support to more than half of US startups and promoted the development and implementation of emerging technologies. “Trustworthy” is the common evaluation of Silicon Valley enterprises and venture capitalists towards SVB. But all of this came to an end on Friday.
On March 10th, local time, the US Federal Deposit Insurance Corporation (FDIC) issued a notice stating that due to liquidity problems and insolvency, the California Department of Financial Protection and Innovation (DFPI) has officially announced the closure of Silicon Valley Bank (SVB) and that the FDIC will take over the bank.
At present, SVB’s deposits have been transferred to the newly established Santa Clara Deposit Insurance National Bank created by the FDIC. FDIC said that as SVB’s assets are liquidated, it will begin to cover these deposits with special dividends and open for business on March 13th.
However, the market is generally not optimistic about FDIC’s takeover and compensation. Many believe that the SVB crisis has sounded the death knell for many innovative enterprises, and the collapse of SVB will not only mark the end of Silicon Valley’s 40-year wealth creation myth but also further affect the development of industries in India and China.
To some extent, SVB’s collapse not only means the end of the era of cheap capital for 10 years but also perhaps represents the beginning of a difficult era.
In Silicon Valley, seeking loans and cooperation from SVB has almost become a “tradition” for startups.
Since intangible assets such as intellectual property account for the majority of assets of technology startups, especially in the internet, software, and biopharmaceutical industries, it is difficult for companies to obtain enough loans from commercial banks by mortgaging fixed assets. Therefore, traditional credit models cannot meet the financing needs of enterprise creditors.
SVB’s emergence provided the US with a new type of financing, which accompanied the development of emerging industries and the entire development process of Silicon Valley.
Public information shows that SVB’s parent company, Silicon Valley Bank Financial Group, is the only bank group in the United States that serves emerging and middle market growth companies, focusing on high-growth industries such as information technology and life sciences, and providing personalized financing solutions to enterprises, individuals, and investment institutions in the market.
“We provide loans to companies that are not yet profitable,” said SVB CEO John Dean in an interview in 1995. “We are happy to lend before other banks.” This strategy has been in place ever since.
“If you’re a high-growth start-up, you can’t get a credit card from a regular credit card provider, and you can’t get a loan from a big bank, but Silicon Valley Bank will give you these,” said an artificial intelligence company founded in 2015 in an interview, corroborating the above view. “These services are not available to start-ups anywhere else.”
SVB’s openness to science and technology enterprises has gradually expanded its business coverage in the US venture capital industry. Public data shows that in 2001, nearly one-third of US technology and life science companies listed on the stock market were SVB clients, and more than half of US venture capital firms were also SVB clients at the time. By 2015, SVB’s business scope covered 65% of US start-up companies, a number that continued to grow in the course of its development.
By 2020, SVB had helped more than 30,000 start-ups to finance their operations and had direct business dealings with 600 venture capital firms and 120 private equity firms worldwide.
Therefore, this event will inevitably have a huge negative impact on American sci-tech startups. On March 11, Garry Tan, CEO of Y Combinator, said on Twitter that the collapse of Silicon Valley Bank would be a “disaster” for startups and would set American innovation back by more than 10 years.
According to NPR, the SVB event has triggered a crisis for tech startups that have heavily relied on SVB for decades, which may result in massive layoffs or the closure of hundreds of startups.
Currently, more than 100 companies have expressed that they will have difficulty paying their employees’ salaries in the next month due to the collapse of SVB.
According to a report by the First Financial News, streaming technology company Roku disclosed in a filing submitted to the Securities and Exchange Commission (SEC) that the company holds nearly $500 million in cash at SVB, accounting for more than a quarter of its cash flow ratio. Roku also stated that most of its deposits in SVB were not insured, and it did not know to what extent the company could recover its cash deposits.
Although the FDIC has stated that it will begin compensation business for insured users on March 13 local time, a regulatory filing disclosed in December 2022 showed that more than 85% of SVB deposits were not insured. At the same time, the FDIC’s claim amount for a single account will not exceed $250,000. Among the depositors of Silicon Valley Bank, only 2.7% of SVB deposits are less than $250,000. This means that 97.3% of people cannot receive FDIC insurance compensation.
Therefore, the general view is that the FDIC’s insurance compensation is of little significance in compensating for the losses caused by the collapse of SVB.
Garry Tan believes: “If the government doesn’t intervene, I think an entire generation of startup companies will disappear from the earth.”
According to Bloomberg, more than 100 venture capital and investment firms have signed a statement supporting SVB, aiming to mitigate the impact of SVB’s collapse and avoid a “extinction-level event” for tech companies.
According to a person familiar with the matter, as of Saturday afternoon San Francisco time, about 125 venture capital firms, including Sequoia Capital, had signed the statement, which was led by General Catalyst. The statement said that if the institution is acquired by another entity, investors will continue to work with the institution.
Also on Saturday, startup incubator Y Combinator released a petition signed by hundreds of founders and CEOs, addressed to US Treasury Secretary Janet Yellen and other regulatory agencies, calling for “relief and attention to the direct and significant impact on small businesses, startups, and their employees as bank depositors.” The petition also calls for the regulation of small businesses that have deposited funds in Silicon Valley Bank and for Congress to “restore stricter regulation and capital requirements for regional banks.”
Meanwhile, some companies have proposed financial assistance to startups that are facing financial difficulties due to the SVB event.
However, it is undeniable that after this disaster, Silicon Valley, which has nurtured countless wealth myths, may become history, and the United States will end an era driven by technological innovation for economic development.