How SVB’s Collapse Effects Proptech

On Friday, 10th March, Silicon Valley Bank (SVB), the go-to bank for US tech startups, suddenly failed due to a bank run and capital crisis. It is the most significant US bank failure since Washington Mutual in 2008, leaving investors, customers, and some proptech companies’ futures in doubt.

This article summarizes the bank’s downfall and what could be on the horizon for proptech in general.

SVB and Proptech

It’s common knowledge that Silicon Valley Bank went big with proptech’s "$228 trillion opportunity," saying, "…in real estate, as in other industries, no matter how ingrained and protected the status quo, a forced evolution has proven imminent.”

What Happened to SVB?

The Federal Reserve raising interest rates, the downturn of tech stocks, the decrease in value of long-term bonds, and a lack of venture capital led to the downfall of the banker. The bank had amassed a $21 billion bond portfolio, yielding an average of 1.79%, and as the 10-year Treasury yield rose to 3.9%, their losses began to mount. Withdrawals from the bank also began to accelerate, with venture capital firms advising companies to withdraw their money. The bank’s stock began to plummet and other bank shares were dragged down with it, leading to the bank being shut down and put into receivership by California regulators.

TechCrunch’s take the following Monday summed up industry fears:

“The impact of this event will be severe, widespread and — for fear of being dramatic — potentially catastrophic for many. Already, businesses are worried about making payroll, which could lead to unanticipated closures and layoffs”.

What’s Happening Now?

While the collapse of SVB initially caused panic on Wall Street, analysts have said it is unlikely to cause a domino effect like the 2008 financial crisis. Moody’s chief economist Mark Zandi stated that the banking system is "as well-capitalised and liquid as it has ever been."

Meanwhile, US treasury secretary Janet Yellen is working with regulators to respond to the crisis to protect depositors, but isn't considering a major bailout .

She told CBS News: "Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out...and the reforms that have been put in place means we are not going to do that again."

How Does the Collapse Affect Companies With Exposure to SVB?

It’s never good to have exposure to a collapsing bank, even if you manage to extract yourself in time. In a LinkedIn post, Michael Mandel, the Co-Founder & CEO of CompStak, raised the issue of Venture Debt, the reason many SVB customers couldn’t have moved their money from SBV even if they’d wanted.

SVB describes its venture debt loans thus: “Venture debt is a catch-all term referring to loans that are tailored to the needs and the risks associated with investor-backed startup companies in technology, life science and the innovation economy. These loans are targeted toward companies that have raised equity from venture capital firms or similar institutional sources.”

But, and it’s a big but considering the collapse, there is a key provision that many Venture Debt facilities have: The company must have its money with the lending bank.

Mandel writes “it is a key reason that SVB tripled its deposits in 2021-2022. It's also the reason that many companies did not jump ship on Thursday and Friday. If they moved their money from SVB, they would trip a covenant of their Venture Debt, and they would lose access to the money”.

Considering broader market conditions and interest rates, it’s unlikely many companies could replace their venture Debt facility with equivalent terms. In the words of Mandel, “It is the fear of losing access to this debt facility that caused many to choose not to pull their money.”

So what does this mean? Simply, many startups' unused Venture Debt facilities are probably wiped out, and it doesn’t take an expert to see how that will cause problems for the companies exposed. On an industry level, the Venture Debt market is likely to change, and probably not in favor of companies seeking finance.

How Does SVB’s Collapse Affect Proptech?

The stabilizing of the banking industry means that proptech firms, without exposure or deposits in SVB, won’t be affected by its collapse. Travtus founder and CEO Tripty Arya wrote, “Amidst the recent developments at Silicon Valley Bank, I want to reassure our customers and partners that Travtus has no exposure or deposits with SVB, and our company cash remains secure. Our operations remain unchanged, and we are committed to providing the same quality of service,” before echoing the thoughts of everybody in the tech industry. “We stand in solidarity with those affected by this situation.”