Startups have been hit by waves of crises over the last few years. First, the pandemic. Then supply chain disruptions, rising costs and economic stagnation.
Now, many are contending with their main bank going under.
What happened with SVB and SVB UK?
Silicon Valley Bank — the bank for nearly half of VC-backed startups in the US — was shut by US regulators on Friday after a failure to raise more funds and a huge outflow of deposits, as founders rushed to take out capital. The Bank of England (BoE) subsequently moved to put SVB’s UK subsidiary into insolvency.
That means SVB customers can no longer make payments or accept deposits. The BoE’s bank insolvency procedure will aim to pay out eligible depositors up to £85k (the amount of funds protected by the Financial Services Compensation Scheme in each UK bank account) as soon as possible.
Why is the SVB UK collapse so important?
Many startups and VCs used SVB as one or the only of their regular bank accounts, in the US and the UK. Many startups also have debt financing from the bank. If startups can’t access their money, they can’t pay staff or suppliers.
Shmuel Chafets, general partner at Berlin-based VC fund Target Global, said that the situation is particularly urgent due to the fact that most early-stage tech companies aren’t yet profit-making, and often rely on investment capital deposited in a bank.
“They’re not profitable companies so their cash reserves don’t get replenished every month. So the deposits could be a huge problem,” he told Sifted.
SVB UK has 3,300 clients, according to the FT, which include startups and investors. That might not seem like a huge number — as many on Twitter have pointed out — but it’s likely to include many of the UK’s biggest and most successful tech companies and VCs. According to Dealroom, there are only 6,369 active UK startups with at least $500k funding.
At the earliest stages, companies in the UK seem to be less reliant on SVB. Only 1.3% of deals on SeedLegals, a platform which helps startups with the legals around fundraising, used SVB accounts. Most SeedLegals deals are angel, pre-seed or seed rounds.
Target Global’s Chafets says that a bigger long-term worry is around the companies that have received debt financing from SVB, which is normally paid out to companies every month. According to Dealroom data, SVB is Europe’s most active venture debt provider.
“The companies that do need to reassess are companies that have a credit line from SVB, that’s just not there anymore. That is a bit of a problem,” he says.
And, given the difficulty of raising equity rounds in today’s market, Chafets believes SVB could leave a big hole in the funding landscape for tech companies.
👉 We’ll be hosting a special edition of Sifted Talks on Tuesday to discuss what on earth went wrong at SVB and what happens next. Register your interest here.
What is the UK government doing?
The Treasury, Bank of England and the Department for Science, Innovation and Technology have been locked in discussions with tech industry representatives throughout the weekend to decide what kind of — if any — intervention can be made to support startups.
The chancellor Jeremy Hunt is expected to make a statement late on Sunday — or Monday at the latest.
Industry insiders say the government’s biggest concern is finding a buyer for the bank or to give guarantees to other banks to extend loans to startups with money at SVB, according to UK media.
“The government is working at pace on a solution to avoid or minimise damage to some of our most promising companies in the UK and we will bring forward immediate plans to ensure the short term operational and cashflow needs of Silicon Valley Bank UK customers are able to be met,” said a Treasury statement released Sunday.
Who might buy Silicon Valley Bank?
The Bank of London, the two-year-old clearing bank, has confirmed that it has submitted a formal proposal to buy the UK subsidiary of SVB.
Sky News has also reported that OakNorth, HSBC Holdings, JP Morgan, Barclays and Lloyds are mulling a purchase of SVB UK, while the FT has reported that a Middle Eastern buyer has expressed interest to the government.
The Evening Standard, meanwhile, has reported the government is looking to line up Barclays as a buyer.
How are startups reacting?
Startups with money tied up in SVB UK accounts were using the weekend to attempt to set up new bank accounts — often not an easy or speedy process — and find other potential sources of funding while they waited for news of a solution.
Some need to make payroll next week and, depending on the size of their organisation, the £85k they can expect to receive as early as Monday from the FSCS might not go far enough.
Lots of businesses are also not sure exactly how much money is left in their SVB accounts, as the portal has been shut down.
Even those businesses that did manage to wire money out of SVB accounts on Friday or have plenty of working capital to hand might find themselves with plenty of work to do.
They’ll need to ask customers to stop making payments to their SVB accounts — and need to have somewhere to redirect that money. Setting up new payments with them — especially if they’re big organisations, or in regulated industries — will take time. Startups will also need to think carefully about how to communicate these requests, without losing any trust.
How are VCs reacting?
Nearly 100 VCs including some of Europe’s biggest firms like Accel and Atomico signed a statement saying that they would encourage portfolio companies to “resume” a banking relation with SVB UK in the event of a sale and if the bank were “appropriately capitalised”.
Some founders criticised the VC response, however, saying that VCs had encouraged portfolio companies to take money out of SVB UK when concerns about the bank first emerged.
Many VCs that Sifted spoke to said that the setback could make VCs deploy even less cash in coming months as they help affected portfolio companies. VC dealmaking has already slowed since last year.