The big news late last week was the collapse, and ultimate FDIC seizure, of Silicon Valley Bank, a sizable financial institution that once had more than $200bn in deposits. SVB was a cornerstone of "startup culture" and was an important partner to many early-stage companies.
Now, it is the second largest bank failure in US history, and the largest since the Great Financial Crisis of 2008.
While it is not yet possible to know the ripple effects of this collapse, we are already seeing cryptocurrencies who had large balances at SVB have great difficulties. One has to ask, "What legitimate business has it's entire livelihood tied up in bank deposits above the FDIC insurance limit of $250,000? It is surely not wise risk management or diversification.
Anyone who has been following this blog will know that we have referred to cryptos as far more speculation that investment. So, perhaps it is unfair to single them out. But what about the real economy and real companies? How are they impacted? In our view, the average large company is likely not impacted much at all. But if market movements are any indication, investors are worried that the high interest rate environment and a likely weakening economy are undermining the profitability of all regional banks, not just SVB.
For those who invest in alternative investments, they will be relieved to know that we have learned of only miniscule balances at SVB at the funds our clients have invested in. This bank failure is more likely to impact early-stage companies who recently raised capital. Again, we have no instances thus far where holdings of portfolio companies had large uninsured balances on deposit at SVB. On the other hand, the SVB collapse could turn out well for newer funds.
From an investment perspective, those investors who have "dry powder" are even more in the catbird's seat in this environment. SVB's closure means that companies have lost an important partner and will, therefore, find it a bit harder to complete their capital raise. Investors with that capital, however, will be able to deploy it at even more attractive valuations. For funds who can gain investors' confidence and attract capital, they will be sowing the seeds for the best returns in a decade.
Nothing is more correlated with VC returns than the initial valuations where positions are acquired. With that in mind, it is hard not to be optimistic about prospects for the latest crop of venture capital funds.