Following Silicon Valley Bank (SVB) Financial Group, a key lender to technology startups, announcing steps to raise funds after suffering losses on bonds, its ripples across the tech investment ecosystem has unnerved prominent venture capitalists everywhere. A deep dive into what happened.
What is SVB?
- The 1983-founded California-based SVB focusses on serving Silicon Valley startups
- It provides multiple services to venture capital, private equity firms in addition to offering private banking services for high net-worth individuals
How big is it?
- SVB has business with nearly half of all the US venturebacked startups, and 44% of the US venture-backed technology, healthcare firms that went public last year
- As of December 31, SVB had $212billion in assets
- The Bank’s clients include household names like Shopify, Pinterest, etc
What went wrong – A timeline
- During the funding boom of 2021, SVB amassed large deposits — $189 billion, which later peaked to a massive $198 billion
- It later invested heavily in bonds, which were being issued in a lowinterest rate scenario. SVB’s balance sheet for 2022-end showed $91.3 billion of securities
- In 2022, the US Federal Reserve started raising interest rates, which drove down the value of bond holdings issued at lower rates
- Rising interest rates also led to venture capital firms cutting fewer and smaller cheques to startups triggering a funding winter
- As funding depleted, deposits made by startups in institutions such as SVB also started declining, forcing the bank to sell securities at a loss to cover up
- On Wednesday, SVB announced it had sold $21 billion worth of bond assets at a loss of $1.8 billion
- SVB also said it was raising $2.25 billion via a share sale
What is the impact?
Fearing insolvency, number of large investors like Coatue Management, Y Combinator, Peter Thiel’s Founders Fund are advising their portfolio startups to withdraw deposits from SVB SVB HAS URGED its customers not to spread panic and withdraw money from the bank
