The collapse of Silicon Valley Bank (SVB) — a unique startup-oriented bank — last week caused nervousness globally. There was a panic among startups, VCs and fund managers that have exposure to the SVB.
However, the intervention of the US government and the FDIC (Federal Deposit Insurance Corporation) averted a major crisis. The FDIC announced that all depositors would get all their money back. This was a massive relief for startups. However, this relief may be short-lived, say experts. They warn the startup world to brace for long-term implications.
What are those long-term impacts? Does it add to the woes of startups already undergoing several crises, including the funding winter? How does this affect Southeast Asian startups? What learnings can startups, VCs, and Southeast Asia’s banks make from this episode?
We posed these questions to a few VC investors (former and current). Below are their comments and insights:
Sergei Filippov, Strategic Partner of MGG Solutions Group and former Managing Partner at Morphosis Capital Partners
The SVB shutdown was painful because the bank has a niche, very concentrated customer base among startups, where all clients know each other.
To give you a context, Silicon Valley Bank has about US$157 billion in deposits from 37,000 uninsured accounts (because these deposits are over US$250,000), with an average of US$4 million in each account. It also has over 106,000 customers with deposits of less than US$250,000 (thus fully insured), which accounted for just less than US$5 billion in deposits. This means roughly 97 per cent of the deposits were from 37,000 uninsured accounts, most of which were startup-related.
SVB has branches worldwide (China, Denmark, Germany, India, Israel and Sweden), and its demise could have wiped out startups worldwide because it was a unique startup-oriented bank. But luckily, it didn’t happen. Depositors were saved when on March 12 FDIC announced that all depositors, including those holding over US$250,000 insurance limit, could get all of their money back. So depositors can stop getting the 10th cup of camomile tea daily and get peace of mind. But we can’t say the same about the bank’s shareholders and bondholders (they were not a part of the bailout deal), but that’s another story.
Also Read: ‘The era of easy money is over’: VCs speak of funding winter and exit landscape in Southeast Asia
Southeast Asia doesn’t have SVB-like banks, and their portfolio is much more diversified. So it was a unique story that cannot negatively affect the SEA markets.
On the contrary, it might increase the attractiveness of Singaporean banks.
SVB was an investors’ investor. Its VC and credit investment arm has directly invested in fund managers and portfolio companies (Sequoia Capital, Accel, Greylock, etc.) for over 20 years. At the end of 2022, 56 per cent of loans to VC and PE firms were in the global fund loan banking portfolio. It also provided venture debt.
It was also a networking catalyst because SVB provided a unique ecosystem of events to bring together startups and investors. So if you were a young startup, though not an SVB client, it looked like you almost damaged your trust level in Silicon Valley.
Edward Tay, Associate Professor at UNITAR, Chairman of Infracrowd Capital, and ex-CEO of Sistema Asia Capital
To understand the impact of the SVB collapse, it is essential to know that even though SVB is a conservative bank with a very traditional balance sheet with a loan-to-deposit of about 40 per cent.
To give a perspective and a benchmark, banks such as Citibank and Wells Fargo and many Southeast Asian banks loan out between 50-80 per cent of their customers’ deposits.
A pertinent contributory factor for SVB’s catastrophic failure is depositing most of their customer deposits (US$120 billion) in long-term government bonds; for instance, ten-year Treasury Notes. What is significant is that US Treasury Notes are at yields as low as 0.1 per cent as of March 2020 and have skyrocketed more than 3.75 per cent recently. This results in a massive devaluation in bond prices and affects SVB’s financial stability despite having a conservative balance sheet.
The net result is unrealised losses in SVB’s 2022 annual reports of about US$15 billion, while their capital base is only US$17 billion.
The event has several impacts on startups in SEA. In the short run, listed entities in Nasdaq and NYSE that have origins in Southeast Asia and have a banking relationship with SVB or Signature will suffer in terms of liquidity. They are mostly in biotech and software domains.
SVB has long been considered a significant lifeblood for global tech startups, providing traditional banking services while funding projects and companies deemed too risky for traditional lenders. However, in the medium run, the risk of a contagion of such financial failure spreading to the rest of the financial institutions across the globe is genuine.
Many startups in SEA have limited banking relationships with the region’s financial institutions, such as CIMB, Bank Mandir, Kasikorn Bank, Bank Rakyat Indonesia or DBS, due to their lower corporate credit credibility and risk management measures. Any contagion effects may not affect these tech startups as much as those US-based financial institutions.
Tech startups have already been suffering prolonged inflationary pressures since Q4 last year, and amid a bleak economic outlook, bordering from recessionary to zero growth across SEA, SVB closure significantly impacts their valuation.
This affects their ability to attract promising quality talents who might be able to continue the innovation and sustain the operation through this period of high volatility and market uncertainty.
The true impact on global startups will come via a domino effect via VC firms or sovereign funds, which are highly sought-after clients by US-based and Southeast Asian financial institutions.
Besides valuation down rounds faced by startups, their VC supporters may have banking relationships with these top banking groups. They might suffer immensely if the Lehman contagion in 2007 were to replay again in the SVB and Signature crisis.
I predict the impact of the SVB collapse on global startups will last as long as two years, and a slow recovery will come in Q2 2025.
Also Read: Fund managers have their task cut out right now: Edward Tay
That being said, quality startups with solid revenue and profitability would still be able to attract venture capital and may enjoy a higher valuation at the opportune market sentiments after the initial shockwaves have subsided due to a shortage of such quality startups globally.
Giulianna Crivello, General Partner, Draper Startup House
We’re not fully aware of the effects of the SVB collapse. The fall of the startup and investor ecosystem over a single weekend was damaging, and some of our SEA portfolio companies have exposure. It’s not always entirely material, but we’re already seeing some of our portfolio companies that have paused rounds because the funds they were in due diligence with have been affected, even if they didn’t bank with them directly.
The Fed has initiated the backstop, so there’s at least a sentiment bandaid. Global startups are highly susceptible to macroeconomic conditions, which the SVB shutdown clearly is. Global startups must rapidly act if the situation worsens. History leads us to believe that quantity will contract, but that leaves room for quality.
Global sentiment from the Valley to Singapore has been shaken
It is in these times that fantastic entrepreneurs will prevail. Global sentiment from the Valley to Singapore has been shaken. We are an international fund, and every founder and investor I’ve spoken to is in full reassessment mode. This is the tip of the iceberg.
Vinnie Lauria, Founding Partner of Golden Gate Ventures
In Southeast Asia, investors are closely watching the tech startup scene in crucial markets like Vietnam and Indonesia, part of Southeast Asia’s ‘startup golden triangle’. This is another driver for expatriate Vietnamese to return to the country by founders who benefit from overseas tech experience.
They will move past the SVB issue quite swiftly and focus on opportunities.
At the end of the day, it’s all about looking for the next big opportunity.
Elvin Zhang, Executive Director, Startech Global Investments (Part of Sinarmas Group)
I don’t think enough attention has been paid to the crazy startup multiple, especially in Indonesia. So this collapse puts the startup ecosystem more under the crosshairs of these kinds of events. People will naturally realise that there is quite a bit of a valuation mismatch.
Also Read: Can Chinese VCs be a potential wild card for SEA during funding winter?
The SVB collapse means the startup valuations will get affected.
We tell our portfolio companies, the direct ones and even my personal angel investment portfolio, that you will close whatever fund we can, stop trying to negotiate valuations, and take whatever follow-up funding because it will still go down further.
Justin Lim, Investment Principal at NEXEA (Malaysia)
It will likely affect late-stage rounds as this is the US VCs’ domain. However, where the early stage is concerned, we don’t expect any slowdown, as capital tends to come from onshore investors.
Having said that, raising large late-stage rounds will get more challenging when US VCs and LPs pull back commitments after this rout.
There will be increased regulations for mid-sized regional US banks, likely reducing the threshold where banks are considered systemically important, which undergo stress testing and enhanced reporting with the Federal Reserve. The cap was increased from US$50 billion in assets to US$250 billion in 2018, ironically lobbied by SVB.
In Southeast Asia, there will be limited long-term implications; the region remains investable as always.
Herston Elton Powers, Managing Partner, 1982 Ventures
The fall of SVB has had a minimal direct impact on most Southeast Asian startups. The potential contagion and increased uncertainty will affect investor sentiment and the already challenging fund-raising environment.
The US market is going through a rough patch. This should highlight how attractive Southeast Asia is for investors seeking growth opportunities. Allocators have been on auto-pilot by concentrating their investments in the US and China and missing out on the Southeast Asia growth story.
Investors and startups should take this event as an essential lesson on concentration risk and the need for diversification.
Rajive Keshup, Partner at Cathay Innovation
I don’t see a significant effect. You have two types of companies built in Southeast Asia: regional and global. If you’re building a global one, and the US is part of your go-to-market strategy, then you will likely have had some exposure to SVB in your path. And so, as a result, having some of your deposits, or some of the money you raised, put at risk is concerning.
It’s a moment when we have to rethink our governance around banking: where we open banks and where the sources of uses of cash flow are from.
Southeast Asian and Indian companies are lucky because they have very sound banking in their backdoor, be it with the Singaporean banking system. And so being able to use that, as opposed to potentially other banks in the West, could be an intermediary step that most boards require and take going forward.
The SVB collapse is a warning sign that the banking system is much more fragile than we think. And that bank runs are a legitimate risk and something we should take seriously and consider when building our risk frameworks.
—
Echelon Asia Summit 2023 brings together APAC’s leading startups, corporates, policymakers, industry leaders, and investors to Singapore this June 14-15. Learn more and get tickets here. Echelon also features the TOP100 stage, where startups can pitch to 5000+ delegates, among other benefits like connecting with investors, visibility through the e27 platform, and other prizes. Join TOP100 here.
The post ‘The SVB collapse almost damaged the trust level in Silicon Valley’ appeared first on e27.
