The collapse of Silicon Valley Bank (SVB) on 10th of March following a takeover by banking regulators, has sent shockwaves through the technology startup industry. The bank’s failure can be traced back to the U.S. Federal Reserve’s decision to raise interest rates, which caused investors to become more risk-averse, leading to some of SVB’s clients facing a cash crunch.
As the market for initial public offerings (IPOs) shut down and private fundraising became more expensive, some of SVB’s clients began to pull their money out to meet their liquidity needs. To fund these redemptions, SVB sold a $21 billion bond portfolio consisting mostly of U.S. Treasuries, which yielded an average of 1.79%, far below the current 10-year Treasury yield of around 3.9%. This resulted in SVB recognizing a $1.8 billion loss, which it needed to fill through a capital raise.
SVB had announced on 9th of March that it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. However, some of SVB’s clients, on the advice of venture capital firms, began to withdraw their money from the bank. This spooked investors that SVB had lined up for the stock sale, causing the capital raising effort to collapse late on Thursday.
The bank scrambled on the 10th to find alternative funding, including through a sale of the company. However, the Federal Deposit Insurance Corporation (FDIC) announced that SVB was shut down and placed under its receivership. The FDIC added that it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.
The collapse of SVB highlights the fragility of the startup ecosystem and the risks associated with a heavy reliance on a single financial institution. Many technology startups depend on the services of banks like SVB, which offer specialized lending and other financial services to the industry. The bank’s failure could lead to a tightening of credit for startups, which could impact their growth prospects.
The failure also highlights the risks associated with investing in low-yield assets, which can result in significant losses if market conditions change. SVB’s sale of a bond portfolio consisting mostly of U.S. Treasuries at a loss underscores the risks of investing in assets that offer low yields, particularly when interest rates are rising.
SVB’s failure is a cautionary tale for the startup industry and investors. The bank’s reliance on a single industry and its exposure to low-yield assets proved to be its downfall. The collapse highlights the need for startups to diversify their sources of funding and for investors to carefully consider the risks associated with low-yield assets. Ultimately, the failure of SVB serves as a reminder that no financial institution is too big to fail.
Silicon Valley is the hub of some of the most genius start-ups, but even they couldn’t handle the crisis. Being always vigilant about the finances has proven to be crucial. This highlights the need for financial experts in every industry. An international certification like the US CMA and US CPA can mould financial experts who are equipped to deal with any crisis and create plans to avoid such a crisis. To start your journey towards becoming the financial expert of the world, join us at Finspire Academy. To know more about us, visit https://finspireacademy.com/.