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.
Those all contributed to a traumatic episode last week — as many startups contended with Silicon Valley Bank, a major financial player in the tech scene on both sides of the Atlantic, going under.
After a weekend from hell, with cash deposits locked away and no clarity on when they might be accessed again, founders and investors could finally breathe a sigh of relief on Monday morning. The UK Treasury confirmed that Silicon Valley Bank UK had been bought by HSBC — which means customers of SVB UK will be able to access their deposits and banking services as normal.
What happened with SVB and SVB UK?
Silicon Valley Bank — the bank used by 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 meant SVB customers could no longer make payments or accept deposits. In the UK, their deposits were protected up to just £85k by the Financial Services Compensation Scheme.
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 firm Target Global, said that the situation was particularly urgent because 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 on Sunday.
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.
Debt financing, normally paid out to companies every month, was also a concern. According to Dealroom data, SVB is Europe’s most active venture debt provider.
What did the UK government do?
The Treasury, Bank of England and the Department for Science, Innovation and Technology were locked in discussions with tech industry representatives throughout the weekend to decide what kind of — if any — intervention could be made to support startups.
As Europe's largest bank, HSBC was an attractive buyer.
The sale means that no taxpayer money is involved. That will please many in the tech industry who were worried any form of "bailout" would damage the sector's reputation.
"The last thing I want as a tech founder is for the industry to be seen as unsustainable by the public and held in low regard — akin to how investment bankers have been seen since the 2008 global financial crisis," wrote one anonymous founder in a piece for Sifted.
Who else was interested in buying Silicon Valley Bank?
The Bank of London, the two-year-old clearing bank, submitted a formal proposal to buy the UK subsidiary of SVB on Sunday evening.
Sky News also reported that OakNorth, JP Morgan, Barclays and Lloyds were mulling a purchase of SVB UK, while the FT reported that a Middle Eastern buyer expressed interest to the government.
The Evening Standard, meanwhile, reported the government was looking to line up Barclays as a buyer.
How did startups react?
Startups with money tied up in SVB UK accounts used 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 needed to make payroll this week and, depending on the size of their organisation, the £85k they could have expected to receive as early as Monday from the FSCS might not have gone far enough.
Lots of businesses were also not sure exactly how much money was left in their SVB accounts, as the portal was been shut down.
Even those businesses that did manage to wire money out of SVB accounts on Friday or had plenty of working capital to hand were concerned they'd have plenty of work to do.
If a buyer hadn't been founded, they would have needed to ask customers to stop making payments to their SVB accounts — and to have somewhere to redirect that money. Setting up new payments with them — especially if they’re big organisations, or in regulated industries — would have taken time. Startups would also have needed to think carefully about how to communicate these requests, without losing any trust.
How did VCs react?
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.
At an emergency Sifted Talks on the crisis, industry experts weren't shy of blaming VCs for creating the panic that began the bank run in the first place. Reshma Sohoni, a founding partner of Seedcamp, added that "governance had taken a back seat" for investors when they were doing due diligence on startups.
After the HSBC bailout was confirmed, there were still questions for UK-based investors over what would happen to SVB's lending business. The bank was a major contributor of debt financing to both VC firms and startups in recent years, and startups were anxious over the future of these crucial products.
Messages seen by Sifted on Tuesday seemed to confirm that SVB UK was still funding new loans under its new management, and that it would continue to operate largely as it had beforehand under the ownership of HSBC. There are no guarantees that those products will remain available, however.