Silicon Valley Bank: How early stage tech companies may struggle to access funding in a more cautious market
Silicon Valley Bank (SVB) has been a prominent player in funding early stage technology companies in the UK since arriving just over a decade ago. Since then it has led the way in providing funding and banking services to countless startups and other early-stage businesses. However, on 10 March SVB’s US parent collapsed and, despite the UK CEO appearing on a Zoom call with investors and customers to reassure them that it was still operating as normal in the UK, a few hours later the UK bank had to apply for £1.8bn of short-term emergency funding via its discount window – forcing the Bank of England to step in.
Over the weekend HSBC emerged as the buyer for SVB’s UK bank, which is a separate entity to the US parent operating under a UK banking licence. The UK business is a profitable entity that faced short term liquidity challenges (a situation no doubt familiar to many UK companies) and the acquisition by HSBC ensures that many UK startups and tech companies will continue to have access to their cash and solves the immediate short-term problem created by SVB’s collapse.
The Bank of England was quick to point out that “SVB UK has a limited presence in the UK and no critical functions supporting the financial system”. However, many tech companies and venture capital firms might disagree.
One of the major consequences of SVB’s failure is that access to funding for early-stage tech companies is likely to become more difficult, in a market that was already faced with an abundance of caution due to economic headwinds. Many SVB customers would have had a tough time had HSBC not stepped in, and no doubt the extra risks this creates will increase the caution of lenders and investors. This means that early-stage tech companies will need to provide more detailed financial information, more robust business plans and face a higher level of scrutiny before they can secure funding. And that’s a problem for businesses who are often reliant on the next fundraise to continue to fund their losses as they scale-up. At the very least it may force companies to scale back their growth ambitions in order to reduce their cash burn rate and wait for the market to recover. That will no doubt have implications for innovation and growth in the tech industry.
The additional diligence will be a significant challenge for early-stage tech companies, which often have limited resources and may not possess the expertise or infrastructure to provide the level of documentation that lenders and investors will be seeking. This means that many companies may struggle to secure funding, even if they have promising business ideas and strong growth potential. SVB was a key player in the venture debt market and it remains to be seen whether it will continue to have the same appetite under HSBC’s stewardship.
These challenges may lead to an uptick in investors seeking exits, at lower valuations than hoped for, as they look to retrench. With multiples already experiencing downward pressure, this could create opportunities for corporate acquirers in the market as well as investors who are prepared to continue deploying funds.
Despite the rescue by HSBC it is unlikely that banking, debt and equity will remain as accessible to early-stage tech companies. The increased caution is likely to make it harder for these companies to secure funding, and this could have serious implications for innovation and growth in the tech industry.