What does Silicon Valley Bank's fall mean to start-up ecosystem
What's the story
An attempt to raise capital gone terribly wrong - that is the simplest way to put Silicon Valley Bank's (SVB) current situation. The Santa Clara, California-based bank's stock, a key lender to technology start-ups, took a plunge in the market on Thursday. Its shares fell by over 60% as investors moved to withdraw their deposits from the bank.
Context
Why does this story matter?
The technology sector has been going through a challenging phase plagued by economic uncertainties, falling revenues, and layoffs. Investors are concerned about an impending recession. This has made them skeptical. As a result, funding for start-ups has fallen considerably. No one expects the tech sector to recover quickly, but the SVB situation, if it worsens, will certainly push the recovery even further.
What happened
SVB announced the sale of $1.75bn worth of shares
SVB's problems began on Wednesday. The bank surprised the market when it announced a $1.75 billion share sale, comprising $1.25 billion of common stock and $500 million of preferential shares. Additionally, General Atlantic agreed to buy $500 million of common stock. The sale of shares was to offset a $1.8 billion loss caused by the sale of a $21 billion loss-making bond portfolio.
Spooked
The bank's sudden announcement spooked its clients
It is not abnormal for banks to raise capital, so what led to the meltdown that followed SVB's announcement? It is usual for banks to raise capital, but large-scale fund-raise on short notice is always a bad idea. SVB's announcement spooked many of its clients. The share sale raised questions about the bank's liquidity and its ability to stay afloat.
Start-ups
Start-ups pulled cash out of SVB
SVB is an integral part of the start-up ecosystem. The bank does business with almost half of the VC-backed start-ups in the US and 44% of technology and healthcare companies that went public last year. Both sectors were hard hit by the interest rate hikes. This forced companies to pull their cash out of the bank, which resulted in SVB trying to raise capital.
Consequence
SVB was seen as a stabilizing force in start-up ecosystem
The beleaguered start-up ecosystem did not need a crisis such as this now. SVB has been the lifeblood of tech start-ups for a long time. When traditional lenders shied away from taking risks, SVB came through. In an otherwise volatile world of start-ups, SVB was seen as a stabilizing force. However, the bank's financial maneuvers have raised alarm bells all over the valley.
Massive problem
SVB's crisis is being compared to Lehman Brothers' in 2008
SVB's predicament is a massive concern for the already struggling start-up ecosystem. Some start-ups have reportedly asked their founders to withdraw their money from SVB to be safe. Many are comparing SVB's fall to the bankruptcy of Lehman Brothers in 2008. However, there is still time for SVB to pull through this. The bank's CEO, Greg Becker, asked clients to "stay calm."