The tech landscape gave a collective shudder last month as Silicon Valley Bank (SVB) was taken in hand by US regulators. America’s 16th largest bank had tried to plug a $2.5 billion gap in its books with a capital raise, but when news spread that the institution was looking for cash it quickly ran dry of another precious commodity – confidence.
SVB’s share price plummeted by 60 per cent while customers and investors came down with a severe case of the jitters. The result of all this? Account holders pulled funds, and two days after it announced the deficit, SVB became a former bank.
This side of the Atlantic, HSBC gallantly swooped in and bought SVB’s UK division for £1. The search for a new owner here was apparently dubbed ‘Project Yeti’, and prime minister Rishi Sunak and Bank of England boss Andrew Bailey are understood to have been scrambling for a backup plan in case the scheme failed.
This episode was a near miss for some 3,000 UK customers of the fallen institution who would have seen funds vanish without intervention.
But what happens next? And what lessons can we draw from the sudden evaporation of SVB?
Contingency coffers
The first lesson is a simple one for founders who housed company coffers with SVB - don’t keep all your funds in one place. While the finance world has attempted to pour cold water on the idea that this collapse is indicative of a wider disaster on the way, this episode has delivered a short sharp shock to entrepreneurs.
Smart ones will be more prudent on where they store their cash, and with whom. We can expect the roll-out of more products that help founders make contingency plans. Extra lines of credit, emergency funds and backup pots will be the preserve of the prepared.
Cultural void, or a maturing sector?
While founders breathed a sigh of relief that their funds were safe, many questioned whether HSBC, a heritage bank, is apt to take on the job of helping bleeding-edge tech firms.
The bank’s size (and a global balance sheet of $3 trillion) makes it among the safest of ports to take in the stricken UK arm of SVB, but what about the culture of innovation that founders loved at SVB? The US-founded bank was lauded by customers for specialising in high-growth start-ups, a category that is unlike traditional businesses.
For instance, a fast-scaling tech unicorn gets a hunk of investment early on in its life, then uses that to build its product and grab market share before actually becoming profitable. Companies like these are less likely to take conventional loans or overdrafts, both of which are services that banks charge interest for.
Whether HSBC and its new slew of tech entrepreneur customers prove to be a good match remains to be seen.
There’s a more optimistic view to take here. Start-ups switching to a tried and tested financial partner like HSBC (from a more daring, less stable one like SVB) could signal a maturing of the sector.
As the era of free money comes to an abrupt halt and founders are encouraged to put profit and prudence ahead of break-neck, cash-haemorrhaging growth, perhaps a more austere bank is in keeping with the times.
Refreshingly, the UK has an opportunity to lead the US in pushing ahead with this era of realism, putting businesses that solve real problems ahead of founders who use Keynote charisma to extract funds on the never-never. Here’s hoping that HSBC emerges as a grown-up bank for a grown-up sector.
