The collapse of Silicon Valley Bank froze start-up funding

The collapse of Silicon Valley Bank froze start-up funding

Jonathan Nelson last month committed $2 million in new funding for his financial technology start-up, HF.Capital, from two investors. He was aiming for $2.5 million and thought it would be “preposterous” to achieve the rest.

Then 67 investors turned him down. In mid-March, his early investors also backed out.

Mr. Nelson was initially confused by the cold shoulder. But two days later, when the most prominent bank for start-ups and venture capital firms, Silicon Valley Bank, closed after tech investors and start-ups ran the bank, it all made sense.

“I was scratching my head, saying, ‘Why were they just ghosts?'” he said. “Then the bank run happened, and I was like, ‘Ah, they’re scared.'”

The same feeling is echoing in the start-up world in the wake of SVB’s sudden failure. After a torrid 2022, when easy money dried up for start-ups, leading to plummeting valuations, dwindling ambitions and massive layoffs, many hope they will bounce back this year. But the collapse of SVB has fueled even more anxiety and fear, which is beginning to manifest itself in start-up dealmaking across Silicon Valley.

Late Sunday, SVB was acquired by First Citizens Bankshare. The failed bank’s former parent company, SVB Financial, filed for bankruptcy on 17 March and plans to run a separate process to sell off the various units.

Over the past two weeks, while regulators scrambled to find a buyer for SVB, companies that depended on it for lines of credit scrambled to secure a new source of credit. Investors, wary of risk, have increasingly elected to sit on the sidelines or are busy helping existing start-ups shore up to entertain new deals. And some young companies are doing what they can to avoid raising new funding so they don’t face low valuations, onerous terms and rigorous due diligence.

The result is a chilly climate for tech start-ups that has turned increasingly cold.

“People are realizing it’s probably not going to get better,” said Mathias Schilling, an investor at venture capital firm Headline. “It was a big shock to the system.”

He said the demise of SVB leading to a bank run showed how much fear the market already had. He added that investors would not have panicked so much if they were not already on the edge.

SVB’s collapse was not directly caused by the tech meltdown, and the start-ups there won’t lose their deposits since the Treasury Department and the Federal Reserve eventually guaranteed all SVB deposits. The institution explosion comes after a 61 percent drop in venture funding in the last three months of 2022, according to PitchBook, which tracks start-ups.

PitchBook analyst Kyle Stanford said he expects SVB’s collapse to “accelerate” a market decline that is already taking place.

“We’ve been in an enterprise slump for a year,” he said. “It’s just kind of an extra problem that the market didn’t need.”

one in survey Of 870 founders polled last week by venture capital firm NFX, 59 percent said the collapse of SVB would make an already tough money-raising market tougher. Twenty-two percent said they were worried they wouldn’t be able to raise any money this year.

Techstars, a start-up investment firm that has backed 3,500 start-ups, advised its shareholders to call on their shareholders for more money before pitching their companies to new investors, said the firm’s chief executive, Myle Gavett. Said. Techstars has also tried to lower entrepreneurs’ expectations of how much their company is worth, urging them not to think of their valuation as low, but rather as a positive sign that someone will invest in their company. ready to do.

Ms Gavett said she expected several talks this summer on whether the start-up should be spun off or sold. She said, “The whole SVB thing created a growing sense of danger.”

Bijan Salehizadeh, an investor with stakes in a dozen venture capital funds, said between a quarter and a third of the companies his funds ran out of money in the next six months. He called it “the worst time in recent memory to raise new venture funds” and said he had recently seen many investors “sitting on their hands” because they were nervous.

Ayham Arexousi was looking to raise $4 million for his start-up Stomio, which provides software to help companies test new products with their customers. But he has lowered his hopes. He was in touch with six to eight investors who showed interest towards the end of last year. But in recent weeks, when he tried to raise money, many didn’t respond or said he changed his investment strategies.

Now Mr. Arexousi is looking to raise less money from his existing investors and return next year for a bigger round of funding. This year is likely to be a “slump”, he said, and concerns over the health of banks are “dropping ice water on the entire funding ecosystem”.

If start-ups cannot raise venture capital, there are few other lifelines available. Stock market volatility has made initial public offerings of stock nearly impossible, while big tech companies are under antitrust scrutiny and face financial pressures of their own.

SVB gave many start-ups a form of credit that other banks found too risky, as young companies are typically unprofitable. That loan, which is typically secured by the start-up’s venture funding, helps companies spread their money toward their next round of funding.

“It’s another capital source that’s pulling back,” said PitchBook analyst Jen Carmen on a recent webinar for investors entitled “Has the Music Stopped?”

Mr. Nelson, the founder of HF.Capital, was previously a Venture Capitalist and has a portfolio of 75 investments. Before SVB collapsed, he told those companies that funding could resume in the spring. Now he is advising them to wait till September to raise the money. Those who are in urgent need of cash have to find a way to become profitable, he said.

That’s his plan for HF.Capital. Mr. Nelson wanted to use the $2.5 million to secure a regulatory license for a software product that would enable international stock trading. But with investors on the sidelines, he now plans to “bootstrap” the company, or expand it using profits instead of outside funding.

“It’s just a brick wall,” he said. “Nobody’s writing checks right now.”

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