Would You like a feature Interview?
All Interviews are 100% FREE of Charge
Silicon Valley Bank It provides traditional banking services while funding projects and businesses deemed too risky for traditional lenders. Billions of dollars of venture capital are flowing in and out of bank coffers.
But the 40-year-old company’s close ties to technology make it particularly sensitive to boom-bust cycles in the industry, and Thursday made those risks very clear.
SVB was forced to make a massive sale of its securities, lost $1.8 billion, sold off its $21 billion worth of holdings, and raised $500 million from venture firm General Atlantic, one of the sources said. I’m here. financial update late wednesday. After the stock surged 75% in the 2021 rally, the SVB lost two-thirds of its value last year, plummeting another 60% during Thursday’s regular trading and another 22% after the close.
For the Silicon Valley region, the problem comes at a particularly difficult time. Venture capital deal activity fell by more than 30% last year to $238 billion, according to pitch bookThat’s still a historically high number, but the lack of IPOs and continued valuation erosion of former high flyers suggests 2023 will bring more pain.
A sign for the high-tech commercial bank Silicon Valley Bank on Sand Hill Road in the Silicon Valley town of Menlo Park, California on August 25, 2016.
The Smiths Collection | Gad | Gad Archive Photos | Getty Images
As a large regulated bank, SVB has been seen as a stabilizing force. However, the company’s recent financial strategy has raised alarm bells among its customer base.
“Psychologically, it’s a blow because everyone understands how fragile things can be,” he said. cruise consultinghelping startups with tax, accounting, and HR services.
Orne called SVB the “crown of Silicon Valley” and a “strong franchise” he hopes will survive this difficult period and even be acquired by a larger bank. For his hundreds of customers, SVB’s withdrawal will likely mean more money to borrow.
“Losing a major debt provider in the venture debt market can drive up the cost of capital,” Orne said.
According to SVB’s mid-quarter update, one of the main issues facing banks has to do with how much their customers are spending. Despite a slowdown in venture investment, total client capital has declined over the last five quarters as cash burn continues at a rapid pace.
“Customer cash burns are still double what they were before 2021 and have not adapted to the slow funding environment,” SVB said.
In January, the SVB expected average deposits in the first quarter to be between $171 billion and $175 billion. That forecast is now down from $167 billion to $169 billion. SVB expects customers to continue to spend cash at roughly the same level as in the fourth quarter of 2022, when the tightening economy was already well underway.
Analysts at DA Davidson wrote in a report on Thursday that “companies have not adapted to the slow funding environment” on spending. It has a neutral rating on the company’s shares, stating, “We remain cautious on SIVB shares due to concerns that the VC environment is slow to recover.”
S&P downgraded SVB from BBB to BBB-, one notch above its junk rating. On Wednesday, Moody’s downgraded the SVB from A3 to Baa1, reflecting “deteriorating bank funding, liquidity and profitability have prompted the SVB to announce actions to restructure its balance sheet.” .
Concerns quickly turned into a potential contagion effect. Will banks’ admitted misfortunes lead customers to withdraw their money and keep it elsewhere? That question was swirling among investors and tech executives on Thursday, even after writing that there is enough liquidity and flexibility.
Mark Suster of Upfront Ventures said, “More people in the VC community need to speak up publicly to defuse the panic around @SVB_Financial.” I have written on Twitter. “When their CEO says they are solvent and not violating bank ratios, I believe it. & The goal was to lift and strengthen the balance sheet. “
Suster funds risk-taking and future-oriented ventures that rely on SVB for banking services.
For example, the Case Studies section of SVB’s website highlights financing a solar panel provider. SunrunDebt Offering to Automated Construction Equipment Vendors Build Robotics and Financing Solutions for Marine Drone Startup Saildrone.
SVB’s bad debt losses remain low. So, at least so far, we’re not facing the kind of credit problems banks dealt with during the dot-com crash and the financial crisis, when bad debts skyrocketed. Rather, analysts focus on the deposit side of the house.
Analysts at Wedbush said: “Given the pressures on the end markets, particularly rising levels of customer cash burn, the SIVB expects continued outflows of customer funds, both on- and off-balance sheet. Equity valuation. This recommendation is “in light of the normalization of SIVB growth after exceptional growth in 2020-2021, and our view that the VC market may continue to face challenges over the next few quarters.” It’s based on belief.”
Moody’s downgrade underscores concerns about the bank’s risk profile, noting that “the balance between shareholder and creditor interests is higher than the average governance challenge.”
SVB still managed to find reasons for optimism. In a section of the report titled “Continued Potential Momentum,” the bank noted that private equity and venture capital dry powder hit a record $2.6 trillion in January. This shows that the startup has plenty of cash.
We can only hope that SVB will continue to be a reliable source of funding as the company is looking to eventually store a significant portion of that money.
clock: Why SVB is not the canary in the coal mine for regional banks