Yesterday, a significant development in the banking world made headlines in the startup community. Silvergate Bank, a financial institution known for its crypto-friendly approach, announced that it would be "winding down operations and voluntarily liquidating" itself. The company’s stock had been under intense pressure in recent months due to various factors, including internal controls issues and regulatory inquiries.
But That’s Not the Only Banking News Making Waves
Silicon Valley Bank (SVB), a well-established institution in the technology industry that works closely with venture capital firms and startups, made a separate announcement. The bank is raising capital via a share sale, taking a $1.8 billion charge to divest itself of low-yield assets and double its term borrowing. In a letter to investors, SVB stated that it aims to "take advantage of the potential for higher short-term rates" and "better protect" its interest-related income.
Investors React with Skepticism
The implied dilution from the share sale and the massive charge on asset sales did not sit well with investors. Shares of SVB plummeted by around 30% in pre-market trading today. However, this is not the most significant aspect of SVB’s news.
A Glimpse into Startups’ Cash Burn
SVB’s investor presentation revealed a telling slide on its mid-quarter performance. The bank expected venture capital investment to slow down after the 2021 peak of the last private-market cycle. Indeed, U.S. venture capital activity fell from $94 billion in the fourth quarter of 2021 to an estimated $30 billion in the first quarter of this year.
Startups’ Cash Burn Rates Remain High
SVB anticipated that with fewer dollars flowing into their coffers, startups would reduce their burn rates. This, in turn, would minimize the impact on its deposit base from startups raising less capital. However, even SVB’s modest expectations for declines in client cash burn have not materialized.
A Recipe for Disaster?
The lower chart in SVB’s presentation shows a stark picture of client fund outflows. The bank highlighted that "client cash ‘burn has not moderated [quarter-to-date]’." This is particularly concerning, given that:
- Cash Burn Among Startups Remains High: At approximately 2x pre-2021 levels and showing no signs of adjustment to the slower fundraising environment.
- Venture Capital Investments Are a Fraction: Of burn rates in Q1 2023, as indicated by the comparison between the light blue column (venture capital) and the fuchsia column (burn).
The Implications
This situation presents a recipe for disaster. With startups still burning huge amounts of cash and venture capital investments being a fraction of their burn rates, it’s likely that many startups will implode due to a lack of funds.
The Current Venture Narrative
The current narrative in the venture community suggests that startups should focus on growth over profitability. However, this approach may be putting pressure on already-strained bank resources. It remains to be seen how SVB and other banks will navigate these challenging times.
Conclusion
In conclusion, the banking world’s big story is not just about Silvergate Bank’s liquidation but also about Silicon Valley Bank’s efforts to raise capital amidst a changing market landscape. The high cash burn rates among startups and the implications for banks like SVB are cause for concern. As the startup community continues to evolve, it’s essential for financial institutions to adapt and find ways to support their clients while managing risk.
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