Facing the failure of Silicon Valley Bank is an existential moment in tech firm financing
Thousands of firms faced a cliff edge last night after the collapse of Silicon Valley Bank, Jeremy Hunt’s response is a test of how much he really cherishes British start ups, writes Tommy Ricketts.
Friday’s failure of Silicon Valley Bank UK has fast become an acute matter of policy-making precedent for the government and the Bank of England. The start up community is watching.
The company my partner and I co-founded, BeZero Carbon, sits in the eye of the present storm.
As a climate tech start up we employ 130 skilled workers innovating in science, finance, and technology. We raised more than £60m over the past two years to support this growth, and banked with SVB’s UK subsidiary.
Thankfully, we were lucky. We had money in other bank accounts and withdrew the majority of our SVB deposits on Friday.
Others were less fortunate. Those with cash in notice accounts, without alternative accounts, or unable to submit transfers were stuck. Many faced being unable to make payroll. Their only certainty on deposits was the £85,000 guaranteed under the Financial Services Compensation Scheme.
Over the weekend, we joined more than 200 chief executives and co-founders in signing a letter to the Chancellor and Bank of England explaining this sour reality.
This morning, HSBC has agreed to buy the UK arm of SVB for £1, and, in doing so, protect deposits critical to the tech industry.
The prevailing view appears to be that SVB is not a bank of systemic importance, in other words winding it up will not put the bank accounts of millions of British households at risk. This message was reiterated by Jeremy Hunt in light of the sale to HSBC.
In circumstances like these, the Old Lady’s new resolution powers ensure bond and equity holders take the pain.
This is, for the most part, right. SVB’s investors should be on the hook. No one is asking for a repeat of 2008. But this treatment should not be extended to SVB’s depositors, and had HSBC not stepped in, it would have created an existential crisis for the tech ecosystem.
Failure to support these businesses is a systemic issue. These are the very companies that will deliver on the government’s ambitions of being a science and technology powerhouse and Europe’s start up capital. They are solving some of society’s biggest and most complex challenges, such as climate transition, financial inclusion, and the future of medicine.
But this moment of upheaval is a lesson in banking for start ups.
As Bill Ackman argues, SVB’s clients will in effect be classified as uninsured depositors with an unsecured illiquid claim. If banking at a “Systemically Important Bank” (SIB) is what matters, what message is the Bank of England giving to depositors at other non-SIBs. Are their deposits safe?
Traditional banks should also take note. Most start ups chose SVB because they offered tailored solutions, were quick to deal with, and were an effective partner. Revolut is the main alternative. Many, like us, have both.
Start ups need large payroll facilities, cash management functions, and multi-currency accounts and payments. They don’t need working capital facilities typical of more mature businesses. That makes them an unattractive client so available services are often slow and basic, if offered at all.
This seems short-sighted. If start ups cross the chasm and become successful, they will be loyal and profitable future customers. Every company was a “start up” once.
It’s reasonable to say the lack of competitive alternatives served to crowd deposit holders into SVB and create a single point of failure.
Meanwhile, start ups are doing all they can to help one another via introductions, advice and lobbying. But it’s out of their hands.
Neither leadership team at the government nor the Bank of England have faced this type of test before. Get it wrong and together they could set back UK innovation for a decade.