Silicon Valley Bank: Lessons learned from failed ‘tech bank’

Uncertainty, panic and urgency are three words I heard rather a lot on Monday morning.

I have been talking to some of the UK-based tech firms which had accounts with Silicon Valley Bank, the bank that failed rather dramatically towards the end of last week.

The UK arm of it, with just over 3,000 business customers, has now been rescued by HSBC but as I write, the online banking facility remains frozen.

SVB was primarily used by the tech sector, and I know there have been mutterings about how much sympathy UK taxpayers should have for the “tech bros” in the event of Treasury intervention.

The people I have been chatting to do not fit that description.

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I asked one worker whether she expected to get paid this month as her firm had only banked with SVB. It was still unclear how much operational cash – money needed by businesses to pay bills and salaries – remained in limbo. “I hope so,” she said.

The one thing everyone I have spoken to had in common was that not only was SVB their main bank – it was their only bank.

“At our next board meetings I want to talk about resource concentration,” said Melanie Hayes, managing partner at the venture capitalist firm BGV, which also banked exclusively with SVB.

“We also need to look at the rest of the business and see where else we might have concentration risk.”

To paraphrase: do not put all of your eggs in one basket.

And also, may I add – choose big, robust, protected baskets that are more likely to be prevented from failing by regulators and governments.

It may sound like a no-brainer, but if you are a tech start-up, it is not as easy as it sounds.

Image caption,
Elin Haf Davies founded med-tech firm Aparito

“The main High Street banks are not supportive to start-ups, because we have perceived higher risks,” says Elin Haf Davies, founder of Aparito, a med-tech start up based in Wrexham that focuses on clinical trials.

Ms Davies said that SVB was popular with the med-tech sector, including both her competitors and clients – many of whom are US-based.

Aparito is still scoping out how much of an impact those clients’ banking problems are likely to have on its own cash flow.

As well as financial services, you should also consider the breadth of your client base, she added.

“Try to have a large distribution of clients so you have a secure revenue stream,” she said, acknowledging that “it’s easier said than done”.

The perception that the big banks are less keen on start-up customers is one I hear echoed a lot.

“Many start-ups are with challenger banks because their account opening procedures are so much more straightforward,” said Ms Hayes.

“It’s hard to open up a bank account with a High Street bank if you’re a start-up business.”

But when I ask why, nobody is quite sure. “If I knew the answer to that…” Ms Hayes laughs.

Chris Edson from Second Nature, a firm specialising in helping Type 2 diabetes patients manage their lifestyles, said that until recently his firm banked with Metro, but had decided to switch to SVB.

Image caption,
Chris Edson from Second Nature

The firm had transferred some money into a fixed-term bond before news began to spread about SVB, but there was still about £1m in the account.

“We faced the dilemma of, ‘do we withdraw our cash and make the problem worse or do we wait?’. I was in a WhatsApp groups with other founders and opinion was split.”

In the end, Mr Edson opted for a transfer back to the old Metro account on Friday morning and while the money appears to have left SVB, it has not yet arrived in its new destination.

But he is confident that under HSBC ownership, all will be well.

“I think every chief financial officer has worked all weekend,” he said.

“Sunday seemed like a real black swan, once in a generation, moment for start-ups. It’s shaken everybody in the VC [venture capital] world to their core.”

One thing it has also done is unite the tech sector together in an unusual moment of business collaboration.

“I’ve never had so many messages from founders or investors as I have over the last 48 hours,” said Mr Edson.

Ms Hayes said she saw tech bosses sharing “practical stuff” like lists of banks which were prepared to open accounts quickly, and personal contacts who may be able to help.

They were also co-ordinating a data-gathering exercise to establish the extent of the problem, which involved sharing quite sensitive company information such as the amount of money firms had at risk and their cash flow requirements.

“We saw other people just sharing solidarity and support,” she said.

“It was good to see people pulling together.”