Failure of SVB will have far-reaching effects on the technological landscape

Throughout the world, Silicon Valley Bank acted as the backbone for many startups and venture capital funds. As a result, the effects of its collapse, which can be compared to those of the 2008 financial crisis in terms of its significance, are likely to be felt throughout the technology landscape globally in the years to come.

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“We believe in the negative ripple effect of this historical collapse will have a myriad of implications for the tech world as we believe SVB was in essence the Godfather of Silicon Valley banking for the past few decades in the tech world,” Dan Ives, an analyst at Wedbush Securities, said in a note on Tuesday that the negative ripple impact will have a myriad of implications for the tech industry going forward.

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Earlier this week, SVB announced that it needed to raise $2.25 billion to shore up its balance sheet, which led to the company's collapse. Venture capital firms advised their portfolio companies to withdraw money from the bank, and other clients also tried to get their cash before it became impossible to get hold of it. In effect, this resulted in a run on the banks.

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There was a massive loss for the bank when it had to sell assets, mainly bonds.

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SVB's deposits were taken over by U.S. regulators on Friday. In an effort to prevent further contagion, regulators said Sunday that SVB depositors would be able to access their money.

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The episode, however, has the potential to influence the technology world in a number of ways, including making it harder for startups to raise money and forcing companies to change their business model, according to investors and analysts who spoke with Trade Algo.

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'Last thing we need’

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SVB played a key role in helping to grow the technology industry, not just in the United States, but also in Europe and China.

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Throughout its 40-year history, the institution has provided traditional banking services as well as funding companies that were deemed too risky for traditional lenders. In addition, the institution has cultivated a close relationship with the technology world. Additionally, SVB also provided other services, such as credit lines and lines of credit to startups as well.

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SVB thrived in good times when the economy was doing well. However, over the course of the past year, the U.S. Federal Reserve has increased interest rates, resulting in a decline in the once high-flying technology sector. Startups in the U.S., Europe, and elsewhere have had a harder time finding funding in the current environment.

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Startup investors are already struggling with the collapse of SVB.

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“This whole Silicon Valley Bank thing really took us by surprise and it was the last thing we needed,” Ben Harburg, managing partner of Beijing, China-based venture capital fund MSA Capital, told Trade Algo in an interview last week.

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In an effort to cut costs, startups have had to tighten their belts while technology giants have slashed tens of thousands of jobs across their organizations.

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During such a difficult time, SVB played a crucial role in providing credit lines or other instruments that allowed startups to pay their employees or handle hard times in a way that allowed them to survive.

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"Silicon Valley Bank provided many financial services to this sector, including payroll services, loans to founders with illiquid credit, and lines of credit. A lot of these companies were already having trouble raising equity and they were counting on those lines to extend their runway, to push out the cash burn beyond the recession we all expect." Matt Higgins, CEO of RSE Ventures, told Trade Algo.

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“Those loans vanished overnight, and no other lender will step in to fill them.”

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EY's global blockchain leader, Paul Brody, told CNBC on Monday that POAP, a crypto firm run by his friend, has half its money in SVB and can't get it out. SVB has a "substantially high amount" of its treasury and has managed to regain 50% of it. Patricio Worthalter, the founder of POAP, told Trade Algo that POAP had a "substantially high amount" of its treasury in SVB. “However, payroll was "never at risk" and the company has "solid credit lines" if needed,” the founder said.

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‘Reboot’

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Startups will also be encouraged to focus on profitability and spend more responsibly in the wake of the SVB collapse.

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“The way companies think about their business will have to change,” Adam Singolda, CEO of Taboola, said on Trade Algo.

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Hoxton Ventures' Hussein Kanji said there will be more restructurings at companies over the next three years, though some companies are holding off.

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“There seems to be a lot of ‘kick the can down the road’ behavior going on, which isn't that helpful, in my opinion. If you have to do something hard, don't wait or procrastinate unless you have a very good reason to do so. There aren't always things that get easier just because you wish for them to get easier in the future," Kanji told Trade Algo in an email.

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The Wedbush analyst said that there could also be more collapses and that early-stage tech startups with weaker hands might be forced to close or sell their businesses.

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“We believe that the ripple effect from this past week will have a profound impact on the tech landscape and Silicon Valley for years to come,” Ives said in a note he sent Sunday.