Silicon Valley Bank’s Collapse Chills Start-Up Funding
Jonathan Nelson lined up new $2 million funding commitments for his fintech startup, HF.Capital, from two investors last month. He’s aiming for $2.5 million and thinks securing the rest will be “permanent”.
Then 67 investors turned him down. In mid-March, his original investors also withdrew.
At first, Mr. Nelson was confused by the cold shoulder. But two days later, when Silicon Valley Bank, The most prominent bank for startups and venture capital firms, fall after tech investors and startups start banking, it all makes sense.
“I scratched my head and said, ‘Why are they just ghosts?’” he said. “Then the bank run happened and I was like, ‘Ah, they’re scared.’”
A similar perception is spreading throughout the startup world following the sudden failure of SVB. After a difficult 2022, when easy money for startups has dried upleads to lower valuations, lower ambitions and layoffs on a large scale, many hope things will turn around this year. But the demise of SVB has caused even more anxiety and fear, which is starting to show in startups across Silicon Valley.
Late Sunday night, SVB has been acquired by First Citizens BancShares. The bank’s former parent company failed, Financial SVBfiled for bankruptcy on March 17 and plans to run a separate process to sell the different units.
Over the past two weeks, while regulators scrambled to find buyers for SVB, companies that depended on it for lines of credit scrambled to secure a new source of debt. Investors, wary of risk, are increasingly choosing to sit on the sidelines or be too busy to help bolster existing startups to attract new deals. And some young companies are doing what they can to avoid raising new funds so they don’t face lower valuations, tough terms and rigorous due diligence.
As a result, the chilly environment for tech startups has quickly turned colder.
“People are realizing that the situation may not get better,” said Mathias Schilling, an investor at venture capital firm Headline. “It was a huge shock to the system.”
The bank run that led to the collapse of SVB shows the level of fear that has gripped the market, he said. Investors wouldn’t cause such panic if they weren’t ready, he said.
SVB’s demise was not directly caused by the tech downturn, and startups that have banked there won’t lose their deposits since the Treasury and Federal Reserve final guarantee the entire deposit amount of SVB. But the institutional boom resulted in a 61 percent drop in venture capital funding in the final three months of 2022 from a year earlier, according to PitchBook, which tracks startups. Kyle Stanford, an analyst with PitchBook, said he expected the collapse of SVB to “accelerate” the market downturn that has already occurred.
“We have been in a state of slow business for a year now,” he said. “This is just a kind of side problem that the market doesn’t need.”
in one survey Of the 870 founders scouted by venture capital firm NFX last week, 59% said the collapse of SVB would make the already tough crowdfunding market even tougher. 22% said they were concerned they would not be able to raise any funding this year.
Maëlle Gavet, the company’s chief executive officer, said Techstars, a startup investment firm that has backed 3,500 startups, has advised its companies to appeal to their shareholders for more money upfront. when inviting new investors. Techstars has also tried to reduce entrepreneurs’ expectations of their company’s value, urging them not to see the undervaluation as a failure but as a positive sign that someone is willing to invest. into their company.
Ms. Gavet said she expects more discussions to take place this summer about whether startups should close or sell. “The whole SVB has created a heightened sense of danger,” she said.
Bijan Salehizadeh, an investor with stakes in dozens of venture funds, said between a quarter and a third of the companies his fund has backed will run out of money in the next six months. He called this “the worst time in recent memory to raise new venture funds,” and added that he’s recently seen many investors “give up” because they’re nervous.
Ayham Ereksousi is planning to raise $4 million for his startup Stomio, which provides software that helps companies test new products with their customers. But he has lowered his expectations. He contacted about six to eight investors who expressed interest in investing late last year. But in recent weeks, when he tried to raise money, many people did not respond or said they had changed their investment strategies.
Now, Mr. Ereksousi is contemplating raising less money from his existing investors and returning next year for a larger round of funding. This year is likely to be a “silly” year, he said, and concerns about the health of banks are “casting cold water on the entire funding ecosystem”.
If startups can’t raise venture capital, there’s little to no other relief. Stock market volatility has made initial public offerings virtually impossible, while major tech companies are under antitrust scrutiny and face financial pressure. their own main.
SVB has provided many start-ups with a form of credit that other banks consider too risky, as fledgling companies are often unprofitable. That debt, often secured by a startup’s venture capital fund, helped companies stretch their money for the next round of funding.
“It’s another capital exiting,” Zane Carmean, analyst at PitchBook, said on a recent webinar for investors titled “Has the Music Stopped?”
Mr. Nelson, the founder of HF.Capital, is formerly a venture capitalist and has a portfolio of 75 investments. Before SVB collapsed, he told those companies that capital could start flowing again in the spring. Now he advises them to wait until September to raise money. Those with an urgent need for cash may have to figure out a way to turn a profit, he said.
That is his plan for HF.Capital. Mr. Nelson wants to use $2.5 million to secure a regulatory license for a software product that enables international stock trading. But with investors on the sidelines, he now plans to “launch” the company or grow it using profits instead of outside funding.
“It’s just a brick wall,” he said. “Nobody is writing checks right now.”