What a week it has been for tech investment. On Thursday 9th March, most of the world had never heard of Silicon Valley Bank (SVB). By Friday, the second-largest bank failure in US history was all over the news, everywhere. By Sunday, US regulators were using emergency measures to prevent contagion across the banking system. By Monday HSBC had bought the UK arm of SVB for £1.
Now, as the digital frenzy unleashed starts to settle, it seems that the traditional banking sector of the past may soon be embraced by tech start-ups and entrepreneurs seeking safe and stable havens.
The sheer size and importance of SVB to the tech sector mean the impact will be felt around the world. For those in economic development, there are important actions you can take to help your tech cluster navigate the choppy seas ahead.
What is SVB and why is it important?
Within tech circles, SVB was the bank of the choice and seen as the bank of the future.
Founded in the heart of Silicon Valley in 1983, SVB is a commercial bank that provides financial services to companies in the technology, life science, and venture capital industries. In short, it was the banker of the future with most of its clients coming from high-growth, innovative and fast-growing companies that require specialized financial services and support to scale quickly in their industries.
Fuelled by entrepreneurs, the bank quickly grew internationally and is a subsidiary of SVB Financial Group with over 30 locations in the United States and around the world, including the United Kingdom, China, and Israel. This means what happens in the Valley, won’t stay in the Valley for long.
Fast forward through the tech bubble and the housing crash, SVB’s reputation within US and international tech industry appeared to be unassailable. They were the entrepreneurs bank.
The majority of SVB’s 40,000 customers are tech companies – with around half of all US start-ups relying on the bank’s services. However, these tech companies are not just confined to Silicon Valley but are integrated into the business and personal lives of the entire world. Given the highly integrated nature of SVB and the tech industry, it means that anything that impacted SVB could triggered an existential crisis within some of the most globalized companies in the world.
To paint this in more darker hues, Garry Tan, President and CEO of start-up incubator Y Combinator, described SVB’s failure as an “extinction level event for start-ups … that will set start-ups and innovation back by 10 years or more.” A few days later Paul Graham – Y Combinator’s Founder – revealed that the incubator’s companies who bank with SVB have over a quarter of a million employees with two-thirds of them based outside of California. This means that the chill winds running through the Valley right now will round around the global via the same digital routes that made their global expansions possible.
What’s the impact for economic developers?
Silicon Valley Bank (SVB) is a powerhouse in the technology industry. The impact of its collapse – and ongoing restructuring – sent shockwaves through the tech community with many entrepreneurs scrambling in the short-term to plan ahead financially. With many of the companies that bank with SVB relying on its expertise and support to grow and succeed, the loss of such a pivotal player will disrupt the ecosystem and make it more challenging for start-ups to access the capital and resources they need to thrive and scale.
From an economic development perspective, the collapse of SVB will have a significant impact on job growth and innovation in the communities that the bank serves. SVB has a presence in many regions across the US and around the world. Its funding of early-stage and growth-stage companies has helped to fuel job creation and economic growth in these areas. Without the bank’s support, it could be more challenging for these companies to scale and create jobs, which could have ripple effects throughout the local economy.
The collapse of SVB could also lead to a loss of investor confidence and a decrease in venture capital funding for start-ups which will slow Foreign Direct Investment from many of the future focused sectors the world is seeking for jobs and growth. SVB has a strong reputation in the venture capital industry, and its collapse could lead to a decrease in investor confidence and a short-term flight of capital from the industry. This could make it more challenging for start-ups to raise funding, further compounding the impact on job growth and innovation.
Banking on hope
But the tech sector is renowned for its endless optimism – especially when faced with calamitous circumstances. Indeed, SVB’s new CEO, is already laying the ground for the bank’s future. Speaking just 3 days after the crises and using the new title of SVB Bridge Bank, he said the bank plans to collaborate with another financial institution or investors to ensure its survival.
Meanwhile, many of the world’s larger and more stable banks are stepping in, excited by the prospect of increasing their technology portfolios and adding high profile founders to their client lists.
There is more uncertainty and instability to come as the public and private markets digest a frenetic week in tech. What started in Santa Clara, California is still rippling out via the fiber optic cables which connects the world’s tech ecosystem into a single market. In the short-term, follow up with your technology FDI projects diligently and sensitively, hold your indigenous tech clusters close and wait to see how long it takes new tech to embrace traditional banking.