Small Banks, Big Impact: How the Collapse of Silicon Valley Bank will affect startups
Silicon Valley Bank (SVB) was once the crown jewel of banks and venture capital, not just in Silicon Valley but globally. Maybe many of us non-US people haven’t heard of SVB, but SVB was the 16th largest bank in the US and the largest bank by deposits in Silicon Valley! It served as an incubator for entrepreneurs, guiding and mentoring them on growing their businesses. It was also a place where venture capitalists and entrepreneurs could meet, creating vital human connections. However, the collapse of SVB signifies a hurtful body blow to the global system for financing innovation. In this article, I examine the financing needs of today’s innovators in the medium-term and the long term, stressing the importance of social capital and incubators.
The Global Tech Community
The tech community has evolved into a global system that supports many different kinds of innovation. The tech startups that get millions of dollars in finance are the ones in the headlines, but the vast majority of tech firms run on a shoestring budget. Collectively, they employ millions of people. Two years ago, researchers at the University of North Carolina and the National Venture Capital Association found that 3.8 million employees at firms that received venture investment between 1990 and 2020–62.5% of them were outside California, Massachusetts, and New York.
Small and Mid-Size Banks
Small, specialized and mid-size banks are often better at giving small business owners financial products and introducing them to others who might help them. They can also provide more industry-specific guidance. With a decline in overall venture capital funding, the concurrent rise in interest rates, and the uncertainty of the current climate, paths to growth and expansion for small businesses will dim. The prospects today are challenging for tech entrepreneurs because their businesses are inherently risky to begin with. Market fluctuations can impact their journeys quickly and very significantly.
Startups and Venture Funds
Startups and venture funds in Upstate New York and Massachusetts are depositors in SVB, and these communities are far from the more famous tech communities of Palo Alto or San Francisco. Some 2,500 venture capital firms had accounts at SVB. Angel investors and operators also banked extensively at SVB; those operations — mostly solo businesses — are much smaller.
An unknown, but probably fairly large, percentage of Silicon Valley’s account holders are startups and venture funds in tech markets in other countries, where tech startups are seen as integral to prosperity and economic growth. Many venture capital funds and startups from emerging markets trusted Silicon Valley Bank with their deposits and as their lender out of a belief that their money was in a well-regulated economy with credibility.
The collapse of SVB will have short-term losses, as it functioned differently than a traditional bank. SVB focused on the tech industry and was a venue for entrepreneurs. Larger and more traditional banks are often reluctant to approve mortgages for entrepreneurs, even experienced ones. Silicon Valley Bank’s employees guided and mentored founding teams on growing businesses, invested in startups, and supported the venture capitalists who collaborated with them. What will happen to these people? Will they bounce back and should we be keeping an eye on other small banks and checking more closely the solvency scores for those we look to bank with?
How does this affect the startup crypto community?
The collapse of Silicon Valley Bank can have implications for the crypto community and startups operating in this area. Like the tech startup ecosystem, the crypto industry relies heavily on social capital and incubators for support, funding, and mentorship.
Just as SVB was a critical player in the tech industry, providing opportunities for venture capitalists and entrepreneurs to meet, it’s easy to see how the collapse of a significant player in the crypto industry could have ripple effects throughout the ecosystem. If a significant crypto bank or incubator were to collapse, it could leave many startups and investors scrambling for support, funding, and mentorship.
Furthermore, the crypto industry, much like the tech startup community, is inherently risky and don’t forget, nothing works in silos — all traditional and decentralized ecosystems are interlinked in some way, shape or form. As a result, market fluctuations and regulatory uncertainty can significantly impact the success of crypto startups. With a decline in overall venture capital funding and the concurrent rise in interest rates, paths to growth and expansion for small crypto businesses may dim.
However, it’s important to note that the crypto industry is decentralized and globally distributed, making it possibly less vulnerable to the collapse of a single entity. The distributed nature of the industry means that there are many different sources of funding and support available to startups, including venture capital firms, incubators, and individual investors.
Nevertheless, the collapse of Silicon Valley Bank is a reminder of the importance of social capital and incubators in supporting the growth of innovative industries like crypto. In the absence of traditional banking support, startups in the crypto industry will need to rely on networks of investors and mentors to weather the current turmoil and drive future growth.
Social capital and incubators are the keys to the survival of tech startups. While the collapse of SVB is a body blow to the global system for financing innovation, the tech community has evolved into a global system that supports many different kinds of innovation. Small, specialized, and mid-size banks are often better at giving small business owners financial products and introducing them to others who might help them. Social capital and incubators play an integral role in the survival and success of tech startups, providing guidance, mentorship, and vital human connections.
Sheesha Finance is a decentralized, tokenized incubator and accelerator that’s helping web3 startups across all industries and blockchain networks build products and services that solve real-world teething problems. Based in the MENA region, Sheesha Finance is one of the first platforms to provide everyday investors with access to a diverse portfolio of early-stage projects, and its smart contract-based system is fully autonomous, making it efficient and user-friendly for both institutional and retail investors.
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Writer: Nathan Cooper, Chief Program and Innovation Officer at Sheesha Finance