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Silicon Valley Bank Collapse Put Pressure on Start-ups

MYFinT Research Team

12 Mar 2023

The Silicon Valley Bank (SVB) - the 16th largest bank in the US has just been shut down by the US regulator (FDIC) on 10th March 2023, the largest US bank failure since 2008.

SVB specialised in lending to start-ups, and it is deemed to be the go-to bank for a lot of start-ups and VC-backed firms. SVB collapsed after failing to raise $2.25bn to cover the loss from the sale of assets (mainly US government bonds) that were affected by higher interest rates. What happened was, related to one of the banking situations called bank run - where most depositors withdraw a large amount of cash from the bank due to the concern about the bank's solvency. Such reactions have crippled the bank and led to a capital crisis.

CheeChing Ong, Research Associate at Malaysian Youth FinTech Association, comments: "I believe that with the intervention of FDIC, there should be no long-term negative effects on a big scale. However, this will have a significant impact on the startup space, especially for those early-stage firms that are unprofitable. The fall of SVB will impact the start-ups' operation due to the lack of cash flow and it has put pressure on some start-up companies on their payroll next week. Although the US policy protects the depositors for up to $250,000, it is not sufficient for companies to sustain the financial outputs."

CheeChing continues: "Start-up companies are having a hard time raising capital and this has been happening for months. The interest rate hike has killed the era of cheap capital for start-ups, and with the fall of SVB, this has created extra pressure for early-stage start-ups as they will need to prove stronger revenue retention in order to capture investor interest."

CheeChing adds: "Economic uncertainty has pushed investors and start-ups to figure out their financial exposure which I believe will have an impact on investors’ trust and the overall growth of the start-up industry. What does this mean to the industry in the coming years? Is the start-up bubble bursting? I believe we can all see more ripple effects very soon in the coming months."

What’s your view on this? Feel free to drop comments in the comment section!

#MYFinT #startup #fintech

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