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The Impact of the SVB Crisis on Early-Stage Companies 

In the heat of the moment 

The recent collapse of Silicon Valley Bank (SVB) sent shock waves around the world and in particular the start-up ecosystem.  While the UK Government was quick to orchestrate the takeover of the UK arm by HSBC, the contagion spread quickly throughout the sector.   

Just to recap on how the events unfolded, on Thursday 9th March, SVB (in the US) announced its intentions to sell $20bn of securities. This news unnerved some of its US clients who began to withdraw funds from their accounts with SVB. With a large client base of tech companies, the news spread rapidly across Slack channels, WhatsApp messages and online forums which led to a run on the bank. On Friday morning, SVB UK sought to reassure customers that its balance sheet was ringfenced from its US parent, but as in the US, founders scrambled to transfer funds to other banks. At 5pm on Friday, the US bank was closed by the Fed and at 11pm the Bank of England announced that the UK entity would commence an insolvency process on Sunday after UK founders had spent the day attempting to transfer funds away from the bank. 

Moving swiftly to find a solution  

While at Oxford Capital we had no banking relationship with SVB nor are any of our client deposits exposed to SVB, across the UK, thousands of venture backed companies and many funds were affected by the crisis.  While the speed of their response certainly contributed to its collapse, the way the industry quickly collaborated to find a solution was remarkable and helped to ensure SVB’s swift acquisition. 

Over the weekend the industry pulled together to support each other, many leading VCs signed a statement saying that they would encourage portfolio companies to “resume” a banking relationship with SVB UK in the event of a sale and over 200 founders signed an open letter to the chancellor, Jeremy Hunt highlighting how important it was to save the bank. 

Within our own portfolio, we spent the weekend working with our founders and their management teams to assess how many of them were affected and advising them on potential solutions.  We were also part of the VC committee at the BVCA which was central to collecting data and informing on policy. 

The ripple effect 

While a solution to the SVB crisis was reached in a relatively short period of time with HSBC acquiring the UK business, the ripple effects are potentially significant – for early-stage companies, investors and the private market. 

SVB’s challenges are likely to accelerate valuation down rounds as less venture debt becomes available which also means the startup mortality rate is likely to increase and redundancies could be on the rise. 

We know that during a downturn such as this, there is generally a flight to quality as investors have a reduced appetite for risk and capital will likely to be concentrated on opportunities that are seen as higher quality.  The SVB crisis is likely to have accelerated this trend.    

An opportunity for HSBC 

The new owner of SVB UK has acquired a small but deeply specialised entity for a bargain price with a team that has a deep understanding of the tech ecosystem. The potential long term value and opportunity is significant for the global bank and will give them access to some of the UK’s best and most innovative early-stage companies.  It also reinforces the Government’s commitment to the tech sector and its importance in supporting the growth of the UK economy going forwards. 

Longer term consequences  

As a sector, the venture capital industry will be spending time analysing the risk practices of the companies in their portfolios and how this situation can be prevented in the future.   

While the SVB crisis has shaken the startup ecosystem, we know from our experience through previous downturns that tech does have the ability to bounce back quickly, to continue driving innovation and foster the best talent.  So, while the core fundamentals remain strong, we continue to be optimistic about the potential growth of the sector going forwards.     

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