Silicon Valley Bank (SVB) once managed over $200 billion in assets and served as the primary bank for many tech startups. However, in a rapid succession of events, the bank collapsed in March 2023, leaving many on both sides of the pond reeling. More than 200 UK startup entrepreneurs have written to Chancellor Jeremy Hunt warning that SVB UK's insolvency poses an ‘existential threat to the UK tech sector’. "Like everyone else, we're worried about how I'm going to make payroll at the end of the month". - Toby Mather, CEO of Lingumi. The History of SVB Founded in 1983 by Bill Biggerstaff and Robert Medearis, Silicon Valley Bank was established to provide banking and credit services to venture-backed startups. Essentially, . As the tech industry grew, so did the bank's business, expanding to include banking and loans for VC firms and publicly-traded tech companies like Roblox and Roku. It also invested in various blue-chip venture funds, as well as healthcare startups. giving credit based on future performance underwritten by being backed by a VC SVB's expertise in working with startups and its specialised venture debt and lending services made it stand out from traditional banks. Its close ties with the tech industry allowed it to understand the unique financial needs of startups and to tailor its services accordingly. This also made it easier for startups to access financing, as SVB's reputation and network within the industry made it a more attractive partner for venture capitalists and investors. In fact, . SVB banked nearly half of all U.S. venture-backed tech and healthcare startups, and its UK arm had over three thousand customers, with deposits of about £7 billion, according to the bank's data Where it Went Wrong Despite its success, there were warning signs that SVB's business model was unsustainable. One of the factors that contributed to SVB's decline was the bank's . over-reliance on short-term funding The other was rising interest rates. During the pandemic, many startups found themselves with extra cash from funding rounds when debt interest rates were at an all-time low, so they placed their deposits with SVB. With little demand for loans from this sector, SVB invested most of the money in long-term bonds. However, . This meant that , resulting in a doom loop further triggered by a lack of confidence in the bank and more withdrawals. when short-term interest rates outstripped long-term rates, many startups began to withdraw and spend their deposits the bank needed to sell some of its longer-dated bonds at a loss of a few billion to fund the withdrawals customers were making from the bank The Collapse of SVB On March 8, 2023, SVB announced that it was seeking to raise $2.5 billion to repair a hole in its balance sheet. Two days later, the US Federal Deposit Insurance Corporation announced that the bank had collapsed, leaving many tech startups concerned about how they would pay their workers and bills. In the US, the FDIC has already announced that the bank will reopen as the . Deposit Insurance National Bank of Santa Clara In both cases, as far as the public knows, no taxpayer money is involved, alleviating fears of a 2008 repeat. In the UK, acquired SVB UK for £1 in a deal facilitated by the Bank of England in consultation with the Treasury. HSBC Many are now questioning the . CEO Greg Becker received $9.9 million in compensation, while two other executives received $4.6 million and $3.6 million, respectively. Most of the compensation was in stock awards. The bank's compensation committee stated that bonuses for Becker and executives had been reduced to hold them accountable for the ‘balance sheet pressures’. It has also been revealed that both Becker and another executive sold shares of SVB the week before the bank failed. high salaries paid to its executives Conclusion Despite being a specialised bank that catered to the unique financial needs of startups, SVB's business model was unsustainable. The collapse of the bank will force startups and VCs to consider diversifying their banking relationships and venture debt structure to avoid a single point of failure. The elements of , which begs the question: unsustainable business models and lack of diversification aren’t new to failure in the banking system how much of the current financial system continues on confirmation bias and is it really working? References: https://www.axios.com/2023/03/11/silicon-valley-bank-rip https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697 https://www.thisismoney.co.uk/money/markets/article-11854977/Turmoil-triggered-rising-rates.html https://www.uktech.news/news/industry-analysis/startups-survive-silicon-valley-bank-uk-disaster-20230312 https://www.wsj.com/articles/greg-becker-was-there-for-svbs-quick-rise-and-even-quicker-fall-2ff25176 https://invstr.com/svb-disaster/p=57600&utm_source=newsletter&utm_medium=email&utm_campaign=Crunch&utm_id=Invstr+Crunch&utm_content=13march2023 https://newsletter.w3academy.io/p/financial-system-lagging-behind-internet-tech

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