Long Term Effects of SVB Crash in Venture Capital

By Ellie Pigott

In the fast-paced and ever-evolving world of venture capital (VC), any calculated risks can disrupt the carefully cultivated ecosystem. One such risk caused a catastrophic event that has sent shockwaves through the VC community, the crash of SVB (Silicon Valley Bank), a prominent financial institution that has been instrumental in financing countless startups. The SVB crash has not only affected the bank itself but has also raised concerns about its ripple effects on the wider VC landscape. In this blog post, we will explore the potential implications of the SVB crash on the VC world and discuss how investors and startups may navigate this challenging situation.

The Potential Implications

1. The Unsettling Effects on Investor Confidence:

The collapse of a prominent player like SVB has undoubtedly shaken investor confidence in the VC industry. Investors are likely to become more cautious and re-evaluate their risk tolerance. The incident may prompt a surge in due diligence processes and stricter investment criteria, as investors strive to avoid potential risks associated with unstable financial institutions. Consequently, startup founders may experience increased scrutiny and a more demanding negotiation process when seeking funding. Not only does this mean a rocky future for startups raising, but for venture firms looking to raise funds as well.

2. Funding Challenges for Early-Stage Startups:

SVB’s crash could particularly impact early-stage startups, which heavily rely on venture capital to fuel their growth. With SVB’s absence, there could be a significant reduction in the available capital for seed and Series A funding rounds. Startups may face difficulties in securing the necessary resources to validate their ideas, develop their products, and scale their operations. This may result in a more competitive funding landscape, with startups vying for the attention of a smaller pool of investors. In addition, with a decrease in investor confidence, valuations will continue trending downward.

3. Emergence of Alternative Financing Options:

While the SVB crash poses challenges, it may also stimulate the emergence of alternative financing options. As startups seek alternative sources of capital, we can expect a rise in other financial institutions and non-traditional funding models stepping in to fill the gap. For instance, crowdfunding platforms, angel investors, corporate venture capital, and strategic partnerships might gain prominence as viable alternatives to traditional VC funding. This shift could introduce a new dynamic into the startup ecosystem, promoting diversification and resilience.

4. A Focus on Financial Stability and Risk Management:

The SVB crash serves as a stark reminder of the importance of financial stability and robust risk management in the VC industry. The bank failed because it bought too many long-term notes at low rates, after word of this slipped that they were under water, many depositors pulled deposits, causing a bank run.  Going forward investors will likely demand greater transparency and accountability from the startups they fund. In turn, startups may need to enhance their financial management practices, establish contingency plans, and demonstrate a solid risk mitigation strategy. This increased emphasis on financial stability may lead to a healthier and more sustainable VC ecosystem in the long run.

5. Potential Regulatory Changes:

Following the SVB crash, regulators might review and revise existing regulations to prevent similar incidents in the future. Increased scrutiny and stricter regulations surrounding the operations of financial institutions could be expected. This may include enhanced oversight, mandatory stress tests, and measures to ensure the stability of banks and their relationships with the VC industry. While such changes might bring additional compliance burdens, they could also foster greater stability and resilience within the financial ecosystem.

The crash of SVB has sent shockwaves through the VC world, introducing uncertainty, and raising concerns among investors and startups alike. While the full extent of its impact remains uncertain, the event calls for a careful evaluation of the VC landscape. The challenges posed by the SVB crash will likely prompt investors to exercise greater caution, potentially leading to a more selective funding environment. Startups, particularly those in the early stages, may face funding challenges and will need to explore alternative financing options. This period of transition could pave the way for the emergence of new players and funding models, fostering a more diverse and resilient VC ecosystem. Ultimately, the SVB crash should serve as a catalyst for greater emphasis on financial stability and risk management.

The Traction Difference

Funds like Traction Capital, among others, are taking a more wholistic approach, in both the way we hold our money and the way we invest. When evaluating startups, Traction assesses the financial risk, the team, and the market. One way we minimize the risk of our investments is by exclusively investing in post revenue companies. This shows proof of product market fit, and evidence of founder follow through. When handling our firm’s finances, we practice banking diversification and to drive a higher return for investors while building relationships with other banks to assist our Founders better with their banking needs. When managing our investor’s money, whether already invested in a company or waiting for deployment in the bank, we believe in transparency.  Traction keeps investors front of mind by sending frequent updates on the status of the portfolio companies, their money and anything in the market that may be cause for concern.

Still Unsure about Banking or Raising Capital?

Traction Capital is dedicated to helping the startup community thrive, especially in this uncertain climate. If you’re interested in changing banks but don’t know where to start, we have a handful of great local banks we would be happy to recommend. In addition, if you’re a startup raising capital or a business owner looking to sell, reach out to Peyton Green at peyton@tractioncapital.com .