Silicon Valley Bank collapse explained: which companies are affected by SVB failure?

The financial troubles at Silicon Valley Bank in mid-March sent companies scrambling to secure money to cover payrolls. Over the just two days, the mass run on the bank that catered to tech-startups, their bosses and employees as well as venture capitalists helped drive the financial institution into FDIC receivership.

While the suddenness of the bank’s collapse caused mass confusion and worries, the federal government stepped in to guarantee all deposits, even those above the $250,000 FDIC insured limit, which represented over 90 percent of deposits held at SVB. Its collapse though is still having ripple effects throughout the US economy, helping to pull down another San Francisco bank, First Republic, which also focuses on high net worth individual in tech and their compnaies.

You may be interested in: What happens to savings and deposits of more than $250,000 if First Republic Bank collapses?

Which companies are affected by SVB failure?

Along with big names like Etsy and Roku, hundreds of smaller companies will be impacted by the SVB collapse, and some may not survive. “This is an extinction-level event for start-ups and will set start-ups and innovation back by 10 years or more,” Garry Tan, chief executive of Y Combinator, told the Washington Post.

Silicon Valley is known as the start-up capital of the world, and many leaders of those looking to make it big in tech, knew they could count on funding from Silicon Valley Bank when other financial institutions refused to lend to them.

As reported by the Financial Times, venture capitalists see the downfall of SVB as an indicator that the flow of funds to startups could slow way down as interest rates impose a higher financial risk on investments to these businesses. For startups that have weathered this crisis and are able to bring a product to market and make a profit, the collapse of SVB is far less concerning. Owners of these businesses can take their money elsewhere, and some already have.

On the other hand, smaller businesses that still require investment to reach that point of profitability may struggle to attract those funds in this interest-rate environment.

Silicon Valley Bank collapse explained

The details of what triggered the SVB collapse are still emerging, but many points to venture capitalists as the group who initiated the bank run. Others say that the fact that the bank did not have a risk officer through most of 2022 put the bank in a fragile position, as rate hikes created new risks for all banks.

The Federal Reserve released a report on its findings from an investigation into the collapse of Silicon Valley Bank on Friday. Vice Chair for Supervision Michael S Barr laid out four key takeaways which spread the blame among regulators and the managers of the failed bank.

Mainly, the bank’s board failed to manage its risk while regulators “did not fully appreciate the extent of the vulnerabilities” which then “grew in size and complexity.” When directors and managers did identify risks, “they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.” As well, the report cited revised federal banking regulations that were loosened in 2019 “impeded effective supervision.”

In the climate space

ABC News reported that more than 1,500 climate-related businesses banked with SVB, and now that it has collapsed “potential funding stream for climate tech projects is now void.” Leah Ellis, CEO of Sublime Systems, a start-up working to reduce the carbon footprint of cement manufacturing, told the Washington Post that SVB “was the go-to bank for clean tech start-ups.” Ellis voiced concerns over how the failure of the bank would impact her “colleagues banked there” and described bank officials as “great partners” who “understood what type of products we needed.”

“We have lost something, and that is a gap that needs to be filled,” insisted Ellis. The Post noted that many like Ellis hope that, at least in the short term, funds from the Inflation Reduction Act could be targeted towards these businesses to bridge gaps in funding. However, if public funds are to be transferred to these startups and companies, the federal government agency tasked with distributing the funds may stricter terms than venture capitalists.

Down the line, if a government-funded project helps to develop a technology that changes the game on climate action, those who made that investment should share in its benefits the same way a traditional shareholder or investor would. The sharing of benefits limits the profits that can be made by private sector investors and could help to explain why so many are calling on the establishment of another private bank rather than access to greater public funds.

Healthcare start-ups were also hit

Earlier this year, in their 2022 Q4 earnings report, SVB announced that it backed forty-four percent of all “U.S. venture-backed technology and healthcare IPOs,” in 2022. While a smaller share of the total market, when compared to climate, the collapse of SVB is being felt very dramatically in the health-tech world.

According to Fierce Healthcare, “a slew of health tech and digital health companies” had been clients of SVB. Some, like Carrot, focus on fertility, while firms like Komodo develop algorithms to improve patient care. These companies may need to look elsewhere for investment since lawyers for the bank have said that they “will be unable to fund its commitments to extend future credit or to perform its counterparty obligations under swaps and other hedging instruments.”

It will take months to grasp the full impact the collapse will have on businesses, both big and small, across sectors. While many firms have regained access to their money, those dependent on investment could shut down if VC funds do not start rolling once again. Given current interest rates and uncertainty facing the market, that investment may not come as quickly as many need.