Silicon Valley Bank — the preeminent bank for tech startups and venture debt in the valley — saw its shares plummet Thursday after announcing it would sell billions of dollars in stock to shore up its balance sheet and cut its outlook for the year.
The bank’s shares fell more than 60% Thursday, closing around $106 — well off its 52-week high of $597. That led to a broader decline among bank stocks, with the Nasdaq Bank Index falling 8%.
The significant drop led to deep concern around the venture world — SVB has relationships with more than 50% of all venture-backed companies in the U.S. and countless VC firms — around the bank’s liquidity and balance sheet strength.
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On a call with venture capitalists, Silicon Valley Bank CEO Greg Becker told them to “stay calm” and that the bank has “ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge,” according to a report from The Information.
That same report said New York-based venture firm USV sent an email to its founders advising them to “only keep minimal funds in cash accounts at SVB,” that is, funds of up to $250,000” and that “SVB is in a severe cash crisis.”
Thursday’s dramatic turn came after SVB said it would sell $2.25 billion worth of stock — including $500 million worth of shares to private equity firm General Atlantic — to shore up its balance sheet.
“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses,” the bank said in a letter to shareholders.
Dealing with a changing market
Silicon Valley Bank’s issues are certainly related to the rocky economy that is being especially felt by the tech and startup sectors.
During the recent venture capital boom, the bank was flush with cash as private companies raised huge sums of fresh capital at sky-high valuations. That cash was stuffed into banks such as SVB — a leading institution in the startup and venture world.
However, as the market has slowed with rising interest rates, that cash has dried up as deposits by startups have dipped amidst a drop in venture funding even they continue to burn cash.
In a presentation to investors, SVB said client cash burn “remains about 2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment,” seemingly illustrating that startups have not reversed their previous patterns of spending.
The bank said it expects cash burn to remain elevated for the first half of the year and expects venture investment in the U.S. to be down about $120 billion to $140 billion this year.
That issue is coupled with the fact that during the high times in venture, SVB made the decision to invest in low-yield securities — which produce little return, especially when viewed in unison with rising interest rates.
The bank has now sold $21 billion of its securities portfolio, which produced an after-tax loss of $1.8 billion in Q1.
Too big to fail?
The 40-year-old banking titan has become synonymous with tech startups and the valley over the decades.
SVB held $212 billion in assets and $342 billion in total client assets as of the end of last year.
The bank’s venture capital/debt-focused arm — SVB Capital — has worked with more than 760 unicorns over the years and as of mid-2022 had $8.8 billion assets under management.
SVB’s rolodex of venture firms it does business with is a who’s who of money in the valley — with names such as Sequoia Capital, Kleiner Perkins and Accel among the most prominent.
According to data pulled from Crunchbase, the bank participated in 75 founding rounds last year — mainly involving venture debt — that totaled $5.7 billion. That included leading a $200 million venture debt round for San Jose-based Automation Anywhere.
That deal number is likely low, as many private companies do not publicly divulge debt financings — but nevertheless shows how intertwined the bank has become to the tech startup ecosystem.
In 2021, SVB took part in 73 rounds that totaled $3.1 billion, per Crunchbase.
Thus far this year, the bank has participated in eight announced rounds, including leading a $30 million debt round for San Francisco-based InfluxData.
Stay up to date with recent funding rounds, acquisitions, and more with the Crunchbase Daily.