SVB crisis sends jitters through startup world: Here's what we know

Silicon Valley Bank (SVB), a key lender to technology startups, is in a tough spot. This after it witnessed a significant decline in its shares on Thursday as investors moved to withdraw their deposits.

What is Silicon Valley Bank?

Silicon Valley Bank is a commercial bank and one of the largest in the United States. It is the biggest bank in Silicon Valley. It is a subsidiary of the SVB Financial Group.

SVB has relationships with over 50 per cent of all venture-backed companies in the US and countless Venture Capital (VC) firms.

What has happened?

Santa Clara-based SVB Financial Group announced that it sold $21 billion of securities from its portfolio. SVB Financial Group also said it was holding a $2.25 billion share sale to shore up finances. The move was prompted by high deposit outflows at the bank due to a broader downturn in the startup industry, analysts say. It also forecast a sharper decline in its net interest income (NII).

The move spooked many prominent venture capitalists, including Peter Thiel's Founders Fund, Coatue Management and Union Square Ventures, who have instructed portfolio businesses to limit exposure and pull their cash from the bank. Whereas some other VC firms have asked portfolio firms to at least shift some of their cash away.

Effect on SVB

Following this share sale by SVB Financial Group, shares of the bank on Thursday suffered their worst drop in over three decades. After a capital offering that led SVB Financial Group's stock to tumble 60 per cent and contributed to the loss of over $80 billion in value from bank shares, Silicon Valley Bank hurried to convince its venture capital clients that their money was safe.

According to media reports, the stocks of SVB took a hit massively after the bank launched a $1.75 billion share sale on Wednesday to shore up its balance sheet following a significant loss on its portfolio. Shares in banks have fallen worldwide - with the four largest US banks, including JP Morgan and Wells Fargo, losing more than $50 billion in market value.

Who are SVB's clients?

SVB is a crucial lender for early-stage businesses and is the banking partner for nearly half of US venture-backed technology and healthcare companies listed on stock markets last year, reports BBC. It lists Pinterest Inc.t, Shopify Inc. and cybersecurity firm CrowdStrike Holdings Inc. among the bigger household names it has served.

SVB held $212 billion in assets and $342 billion in total client assets as of the end of last year, and 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.

What has the bank said?

Silicon Valley Bank's Chief Executive Officer Greg Becker said in a letter to shareholders Wednesday, "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 that client cash burn remains 2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment.

Consequence of SVB's collapse

After the dramatic turn of events, Moody's immediately downgraded the bank's credit rating to Baa1 negative outlook from A3.