Dozens of local start-ups have money tied to the financier
The bank collapse has hit Australia’s big tech investors, with some start-ups worrying they won’t be able to pay their staff or rent.
Australia’s big tech investors have been caught up in the collapse of Silicon Valley Bank, the second-biggest bank failure in US history, after it emerged dozens of local start-ups have money tied to the financier through the nation’s major venture capital funds.
Australia’s largest venture capital firms Blackbird along with AirTree, Square Peg and Folklore confirmed they hold exposure to the collapsed lender in what’s being labelled a potential ’extinction level event’ that could set start-ups back a decade.
Paul Bassat, co-founder of venture capital outfit Square Peg, said the market shock could lead to a crisis for the venture capital industry. SVB served around half of all venture capital-backed businesses in the US.
“SVB has strong roots in the global start-up ecosystem and the current situation will have implications that are likely to be broad and vary enormously depending on developments in the coming days,” Mr Bassat said.
“If SVB is acquired, or depositors are kept whole by the Fed, then it is possible some of these implications may be contained. If not, we may see a number of start-ups unable to meet payroll, experience significant lay-offs, and a further crisis in confidence in VC markets.”
Three start-up founders told The Australian on the condition of anonymity that they had been advised to take their cash out of SVB, which they had done late last week.
“There’s lots of chatter about ability to make payroll and rent … I think we are going to see a lot of companies fail,” one start-up founder said.
Australian venture capital firms worked over the weekend to determine which of their start-ups had exposure to SVB, with some company founders worried the bank’s failure will mean they won’t be able to pay their employees or will be forced into lay-offs.
Before its spectacular collapse, SVB offered mortgage lending, private stock-based lending and lines of credit to start-ups globally, including in Australia. Its failure has stoked concerns of more pain for a sector that was already struggling with high interest rates and a dry-up in venture capital funding.
A spokeswoman for one of Australia’s largest venture capital firms Blackbird did not disclose which of the company’s start-ups had exposure to Silicon Valley Bank but said its executives had been closely communicating with start-up founders over the weekend to work through potential impacts.
“SVB has been an active supporter of the Australian ecosystem for over a decade. This is a sad day for the start-up ecosystem globally,” she said.
“Our job is to support our founders with practical solutions. Since news of the situation broke we have been working closely with the impacted portfolio companies to understand the extent of any exposure and to help them find solutions.
“We have also set up a forum for our founders to share their thinking and actions.”
Folklore Ventures managing partner Alister Coleman said that his VC firm had long recommended to its start-up founders that they limit the amount of working capital in offshore accounts.
“As a result, across our portfolio, we have less than 1 per cent exposure to this issue, despite having multiple companies operating in the US with growing businesses,” Mr Coleman told The Australian.
“Where we have companies that have exposure, we have been actively engaged with those companies to provide them the information and alternatives sources of short-term working Capital to help resolve the issue. However, in each of these cases, the effective on these companies is quite limited.
“Silicon Valley Bank has been an excellent partner to VCs in the technology ecosystem for decades. SVB is gone, but the efficiency of US capitalism means this issue is likely to be resolved swiftly. Obviously we feel for everyone affected by this development, especially founders and their teams.”
Tech Council of Australia chief executive Kate Pounder told The Australian she’s “closely monitoring the evolving situation”.
She said she’d been in contact with the federal government to understand the potential impact on Australian technology companies and their employees.
“We’re working with member companies, including local VC firms, to understand the extent to which Australian firms are impacted by Silicon Valley Bank being placed into receivership as some Australian companies held deposits or had loan facilities with them,” Ms Pounder said.
“While many Australian tech firms did not bank with SVB or were able to transfer deposits out, we are aware that some firms have been impacted. We will co-ordinate with them and the government as more information on the situation becomes clearer.
“If companies have been impacted, they are welcome to contact the Tech Council.”
Square Peg’s Mr Bassat said his firm did not have a direct relationship with SVB and most of its portfolio start-ups have not been impacted.
“Like many of our partners in the start-up community, we are deeply saddened by the events of the past few days, and the possible implications for start-ups globally,” Mr Bassat said.
“Fortunately none of Square Peg’s portfolio have a short-term working capital crisis or any long-term existential risk.
“While some of our portfolio companies have had exposure to SVB, in a number of cases they were able to withdraw all of their funds or reduce their exposure late last week, but a few of our portfolio companies have remaining deposits with SVB. We are in ongoing conversations with all of our portfolio companies and are supporting them through this uncertainty as best we can.
Craig Blair, partner at major VC firm AirTree Ventures, said in a best case scenario another financial institution will step up and agree to buy SVB, automatically strengthening its balance sheet.
“Presumably this would facilitate the reopening of client accounts,” he said. “Worst case scenario is that the market opens on Monday and SVB remains a ward of the state. At this stage it’s unclear what percentage of the deposit base they would be able to recover.
“At a macro level, we’re monitoring the situation. Our expectation is that the second-order effects will be primarily limited to the tech sector, but businesses that have tech companies as customers may also be impacted. Furthermore, the turbulence in the upcoming weeks is likely to exacerbate the tight capital markets. At a portfolio company level, we’re working with them on a case-by-case basis to determine how they can mitigate short term risks.”
Garry Tan, the president and chief executive of US tech accelerator program Y Combinator, started a petition to Treasury Secretary Janet Yellen on the weekend urging regulatory intervention to save the thousands of start-ups with money invested in SVB.
According to the US National Venture Capital Association, Silicon Valley Bank has over 37,000 US-based small businesses and start-ups with more than $US250,000 in deposits.
“In the Y Combinator community, one-third of start-ups with exposure to SVB used SVB as their sole bank account. As a result, they will fail to have the cash to run payroll in the next 30 days,” the petition reads.
“By that measure, we can estimate that payroll-related furlough or shutdown will impact more than 10,000 small businesses and start-ups. If the average small business or start-up employs 10 workers, this will have an immediate effect of furlough, lay-off, or shutdown, affecting over 100,000 jobs in the most vibrant sector of innovation in our economy.”
Mr Tan said that Silicon Valley Bank’s failure has a real risk of systemic contagion.
“Its collapse has already instilled fear among founders and management teams to look for safer havens for their remaining cash, which can trigger a bank run on every other smaller bank,” he said.
‘This is an ‘extinction level event’ for start-ups and will set start-ups and innovation back by 10 years or more.
“BIG TECH will not care about this. They have cash elsewhere. All little start-ups, tomorrow’s Google’s and Facebooks, will be extinguished if we don’t find a fix.”
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