• Over the course of nearly 40 years, SVB has solidified itself as the leading lender and banking partner for many successful venture startups. This brand recognition and trust resulted in SVB amassing more than $175 billion in total deposits by the end of 2022; however, as liquidity options for many startups dried up, these enterprises began to heavily rely on fund withdrawals from their bank accounts to extend runway. To fund these withdrawals, SVB was forced to sell a large amount of US Treasuries and other securities, which had become devalued due to recent interest rate hikes. Fearing for the safety of their capital, depositors began to withdraw their funds en masse. Ultimately, SVB was unable to fulfill withdraw requests, and the bank was seized by the FDIC on March 10; fortunately, the Fed assured all depositors that 100% of their capital would be safe and accessible as of Monday.

• The failure of SVB puts more pressure on a venture market that was already reeling from the slowdown in financing seen over the past year. Quarterly capital invested had fallen more than 60%, and deal count, while high on a relative historical basis, was down nearly 25%. The reallocation of resources and banking that may need to be done will only add to a slowdown in a financing market that was looking set for another soft quarter in Q1 2023.

A large portion of the bank’s loans were to GPs in both VC and PE. The credit allowed these funds to quickly access capital for deals, creating a more seamless investment market.

• The lightning strike of SVB’s collapse led to concerns over a possible contagion effect on other regional banks collectively suffering from the same type of unintended consequences of the Fed’s interest rate hikes. Now that the lender of choice for many investors for decades is suddenly gone, we expect to see startups and investors looking to raise funds from nonbank lenders. While it remains unclear what will happen to companies with existing loan contracts with SVB, as an acquisition is yet to be announced, should VC-backed startups rush to raise debt from nonbank entities, competition for loans may push prices higher.

• Even though SVB’s venture debt portfolio wasn’t the primary cause of the bank’s abrupt fall, the critical role the bank has been playing in venture lending sounded alarms to active players in the venture market. For example, Hercules Capital, one of the largest business development companies focused on venture lending, released a business update in response to SVB’s collapse on Monday morning. Venture debt lenders will likely receive an intensified number of inquiries and closer scrutiny in the short term.