Lessons to learn from the SVB collapse and move on

Venture capitals (VCs) and startup firms worldwide, including in China, India, and Thailand, were threatened directly and indirectly when SVB, a major US tech lender, abruptly collapsed. It sent shockwaves through the global financial system.

SVB's liquidity problem

SVB, the 16th-largest bank in the United States, was founded in 1983 with the principal objective of serving as a bank for VCs and startups.

More than 50% of VCs in the US had an account with SVB to facilitate easy and convenient financial transactions.

The seamless networking between VCs and startups, enabled by a high-performance application programming interface (API), and the fewer restrictions imposed by other conventional banks sent them to SVB.

Funds deposited by tech companies were allocated for long-term bond investments, which accounted for more than 80% of the investment portfolio of bonds issued in the United States and Canada.

The crisis

The hike in interest rates by the US Federal Reserve and the European Central Bank to combat inflation precipitated the SVB crisis.

Even though newly issued bonds enjoyed high yields due to the higher interest rate, the SVB bonds issued over a long period of time plunged in value as the Fed dramatically and continuously raised interest rates.

Customers panicked, which led to a run on the bank.

As customers withdrew massive amounts of cash because of the uncertainty over the bank’s situation, SVB was forced to sell off its depreciated long-term bonds to access liquidity.

SVB executives attempted to convince the stakeholders to contribute additional funds, but they were unsuccessful. The situation worsened, leading to the bank's share price plunging to its lowest point since 2016.

To protect insured depositors, the Department of Financial Protection and Innovation had to take control of the bank and shut it down.

Lessons learned

SVB’s collapse appeared to be a wake-up call to the financial world. We have learned about the significance of diversification in terms of investment and portfolio management.

Despite the fact that the tech-lender bank’s operations remain active, the error may be related to SVB's primary clients, who are mainly startups and VCs, both of which are particularly vulnerable.

Additionally, the portfolio was also heavily weighted towards US and Canadian assets. The cumulative impact of all these factors placed SVB in an unstable situation.

If the bank’s investment portfolio had been spread out around the world for better liquidity management, the situation may not have worsened to this extent.

The next move

Although "Jitta", Thailand's leading tech startup, was unaffected directly by the SVB collapse, we recognise that startups need to conduct a comprehensive evaluation of all potential risks from various angles.

Running a startup business from now on could be difficult and challenging to get funding from VCs. Along the way, they may confront challenges in technology development, which require enormous investments in human resources and other forms of technology and innovation investment.

The funding they receive may end up as a cash burn rather than for revenue and customer growth.

Due to excessive spending and poor cash-flow management, a substantial number of startups are unable to survive and eventually fail. This is crucial not only for startups but also for all businesses in all industries.

In the financial world, businesses and startups face the same challenges: economic uncertainty, inflation, interest rate fluctuations, and ever-changing regulations. All these factors force VCs to reassess their portfolios and pending investments.

Startups must be cautious to properly manage finances and maintain their financial status, which will allow them to survive in unanticipated volatility.

Raising funds for a startup will no longer be the same. It will not be as simple as it used to be. The year 2021 marked the biggest year for startup successes worldwide. However, a year later, investment in startups declined due to interest rate hikes and inadequate liquidity.

VCs have to exercise more caution and invest wisely in startups due to lesser accountability compared to companies listed in the stock market.

Challenges for startups

The challenge for startups is to focus on maintaining strong growth, have lower investment costs, and ensure profit generation rather than burning cash.

However, it must be said that the failure of a big player bank does not signal the end of opportunities for startups worldwide. New players such as Jungle Ventures and Golden Gate Ventures are already interested in taking SVB’s place, as they still see room for VCs to invest in Southeast Asia, including Thailand.

As already mentioned, it is very important for VCs to adopt a diversification strategy in their portfolio when investing in startups.

Meanwhile, startups should maintain their goals and focus more on managing their business operations gradually step by step in order to achieve long-term success and sustainable growth.