The recent collapse of the US-based Silicon Valley Bank (SVB) has sent global shockwaves across the venture capital (VC) and startup sectors. This is in line of a recent forecast for the 2023 VC scene that predicted an “unpromising” future due to the evolving risks and challenges. SVB was a bank that tailored its products and services toward innovative founders, investors, and other startup ecosystem stakeholders, enabling them to fund their companies, invest and nurture up-and-coming businesses. That is why reviewing the SVB saga and its impact in Southeast Asia is essential.
SVB catered primarily to businesses in the tech and health sectors and VCs and private equity (PE) firms. In 2022, SVB incurred considerable losses due to increased interest rates and its heavy investment in long-term Treasury bonds. In March 2023, the Wall Street Journal (WSJ) reported that SVB had collapsed due to poor risk management. There was also a bank run instigated by tech industry investors, which piled increased pressure and inspired public panic.
The funding scene in Southeast Asia: we examine the decline in fintech startups as investors become risk-averse
Startup founders were already worried about a fall in Southeast Asia tech funding, and SVB fallout concerns will add further uncertainty to the ecosystem. The US government had to respond quickly to prevent the panic from spreading to other banks, with the president announcing that the country’s banking system was safe. The Federal Deposit Insurance Corporation (FDIC) took over SVB, allowing customers access to their funds.
The fallout from the SVB scandal
According to CNN Business, SVB customers support the bank, vowing to keep their money there and urging others to remain with the lender. Hemant Taneja, CEO of VC firm General Catalyst, said that his company and other VC firms like Upfront Ventures, Bessemer VP, Lux Capital, Redpoint, Mayfield Fund, and others are actively working together with SVB.
Taneja wrote on Twitter, “As venture capitalists and customers of SVB, we are recommending our portfolio companies to keep or return 50% of their total capital with SVB. [With the FDIC takeover] We believe SVB is now one of the safest and most secure banks in the country.”
The statement also revealed that 650 VC firms supported SVB because the bank had helped many tech startups thrive. As such, the goal of the VC companies was to ensure the bank survives so that it can continue serving startups and investors from all over the world. The FDIC now guarantees that existing and new deposits are protected, new loans issued, and existing loan commitments honoured.
However, CNN Business discovered that not all startup founders were eager to remain loyal to SVB. Many CEOs endured a problematic period seeking to get their funds, trying to move their money to other banks, and felt uncertainty over whether their deposits would be safe. Thus, they wanted to avoid banking with SVB and risking a similar experience in the future.
Startups in Southeast Asia have already been expecting and experiencing reduced VC funding. Global economic issues are affecting investors, such as inflation, supply chain disruptions, a possible recession, mass layoffs, governance issues and fraud, and more, leading them to cut back on providing financial support to new businesses. The collapse of SVB may further create a climate whereby investors are even warier about backing companies in the region.
Impact on Southeast Asia tech startups
Writing on LinkedIn, Vinnie Lauria, the founding partner of VC firm Golden Gate Ventures, highlighted that most Asian startups were not banking with SVB, meaning the companies had little direct exposure to the effects of the bank’s collapse. However, SVB was more than just a bank. It offered other products and services that Southeast Asian VC firms minimally invested in. Regardless, VC firms will be more affected by the SVB collapse than startups, and replacing some of its offerings will be difficult.
Lauria added that his firm maintained its “bearish view of the global markets”, having predicted that this trend would continue from last year till the end of 2023. As such, with startups going through a funding winter, he advised CEOs and founders to be prudent with their budgets and to keep a streamlined workforce. Furthermore, he asked startup CEOs to speak with their investors about any exposure from the SVB saga and its impact in Southeast Asia and to rethink which partners are safe enough to fundraise with in the future.
While the reduction in Southeast Asia tech funding and SVB fallout effects are concerning, there are steps startups and founders can take to protect themselves. First, they must be careful where they keep their money and only choose stable banks with better risk management policies. Second, they should check the people they are dealing with to ensure they have adequate funding and are not exposed to bad loans or other financial risks. Finally, they should maintain healthy cash flows in their businesses, streamline operations, and put the correct management and policies in place.