Silicon Valley Bank Tremors Threaten FinTech Shift

In Silicon Valley, and especially for smaller tech firms, the tremors are threatening to become an earthquake.

Just a day after Silvergate Capital said it would close and wind down its bank’s services to the crypto industry, we’re seeing further focus on liquidity in the banking sector… and how it could affect the smaller companies that rely on lending and capital to get off the ground and continue operations .

As has been widely noted, SVB Financial Group, the parent company of Silicon Valley Bank, saw its shares fall 60% on Thursday, and another 18% in after-hours trading, as the firm sold off some of its holdings at a loss and raised $500 million to strengthen their financial position. The company sold $21 billion of US Treasuries and securities – and it is going to realize a loss of $1.8 billion on those sales.

SVB also said it was launching a guaranteed public offering, seeking to raise about $1.8 billion through the sale of common and preferred shares. A customer, General Atlantic, an investment fund, has also committed to invest $500 million, meaning SVB will raise a total of $2.3 billion. The capital raising offsets the loss from the sale of assets.

The company said in a Wednesday update that “we are taking these actions because we expect continued higher interest rates, pressured public and private markets and elevated cash burn levels from our clients as they invest in their businesses.”

The latest comments hint at the fact that the lifeblood of innovative firms, FinTechs among them… is going to be a little harder to find. We are of course talking about capital. The same businesses that have been Silicon Valley Bank’s key customers—venture capital firms and startups—have been drawing down their deposits (i.e., burning cash). Inflation and higher interest rates affect everyone.

Pressure from all sides

For the traditional banking model, it is a double whammy: Shrinking deposits means that there is less money to collect and lend to other borrowers. Meanwhile, the cost of doing business for the bank is more expensive. Margins are under pressure, which will tend to deter investors from investing in the company (such as buying new shares being issued), as yields also appear to be under pressure.

Meanwhile, in a nod to SVB’s scale and reach, and just what it all bodes for technology startups and FinTech funding, the company’s latest earnings results show the firm knocked off around half of the venture-backed tech and life science companies. and more than 40% of VC-backed tech IPOs. Of the global fund banking portfolio, technology is generally part of 39%, FinTechs are 3%. Elsewhere on the company’s website, SVB noted that it is the “finTech industry banking leader,” and has said that 71% of FinTech IPOs since 2020 were public offerings by SVB clients — and that’s $3.8 billion in loan commitments.

For SVB, being the best provider of financial services to these companies and the funds that bankroll them can prove to be a double-edged sword.

As recently reported by PYMNTS, FinTechs that have gone public through the pandemic are now trading at roughly half of their listed value. It will be more difficult for these (or other) FinTechs to enter the market for new listings; it will be more difficult for them to get private capital raisings… and all this means pressure for SVB’s model, which will presumably get some tailwind from these activities.

Meanwhile, and as reported by websites such as Bloomberg, Founders Fund, the VC fund co-founded by Peter Thiel, has advised companies to withdraw money from SVB. It’s the kind of alarm that, once sounded, sparks bank runs.

A little over a year ago, as reported by PYMNTS, we put the spotlight on Silicon Valley Bank, and Milton Santiago, SVB’s global head of digital services, noted: “We have the most demanding clients in the world because these are the innovators who focus their lives on changing how people do business.” These customers, and the bank that has earned its name to serve them, are being put to a test that would have seemed unimaginable just a few days ago.