Silicon Valley Bank (SVB) failure drives tech valuations down despite full guarantees

Silicon Valley Bank (SVB), a big lender in the thriving Californian tech startup community, is in default. The Federal Deposit Insurance Corporation (FDIC) took control of the bank’s $175 billion in customer deposits on Friday. And the Treasury, Fed and FDIC jointly guarantee deposito holders full access to their accounts. The same for Signature Bank, another regional bank that tumbled on Sunday.
SVB, a publicly listed bank, got in problems after massive write offs on its US bond portfolio. A last ditch attempt to raise 2.25 billion USD in fresh capital failed. A bank run followed. Therefore the FDIC stepped in and created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one. The new entity is operating by Monday and clears checks issued by the old bank for customer deposits, and not just till $250,000. The authorities decided to stem the uncertainties and problems for customers with larger deposits, and designated SVB a system bank.

Out of fear for contagion, financial stocks all over the globe went down since Friday. Probably an overreaction as SVB is not a global system bank like Lehman Brothers, the fall of which ignited the financial crisis and recession of 2008. In today’s dollars, the assets of Lehman were around 4-5 times bigger than SVB’s. Furthermore, the quantitative easing has resulted in an economic environment where there are sufficient cash buffers to cushion the impact. Even taken into account the quantitative tapering. Therefore, the effects of SVB’s failure are most likely limited to the tech scene in Silicon Valley and the UK, where SVB has a daughter company, including their financial backers. The move of the authorities helps to prevent them running out of cash, but doesn’t save the bank’s investors. These investors lose their money, although other bank might benefit from the influx of deposits.

On Monday, HSBC announced to take over SVB UK \for £1 to ring-fence the fall-out in the UK and Europe. Also the US financial authorities look into orchestrating a take-over of SVB to further contain spillover effects, as had been recently done with Silvergate Capital, the bank of choice of the crypto community. The trust in regional banks in the US is tanking. The authorities strengthen interbancary funds to stave off panic reactions that might lead to further bank runs and regional bank failures. It is also speculated that the recent developments might slow down the Fed’s pace of interest hikes.

What’s the impact for the wider tech sector? The global market for venture debt, SVB’s specialty, takes a big hit. For startups and scaleups it has become harder to finance growth with debt. This accelerates the downward trend of especially SaaS valuation multiples. Moreover, Silicon Valley tech companies that are desperate for cash will accept lower valuations. And these prices set the global standard. 2022 was already the year of the SaaS crunch. In 2023, SaaS businesses will hit rock bottom. It might be the beginning of the end of different valuation metrics for SaaS. Good old EBITDA and earnings multiples might do the valuation job as well.

Martijn Hoogeveen

Founder and CEO of Icecat NV. Investor. Ph.D.