The Silicon Valley bank’s struggles began with a bad bet on long-dated U.S. bonds. A rise in interest rates means that the value of those bonds has fallen. When depositors began to worry about the bank’s balance sheet, they withdrew their money. High interest rates have become a challenge in the industry, ending the cheap loans that tech companies have become accustomed to over the past decade and reducing available financing.
More than $400 billion worth of value has been wiped from Europe’s tech industry by 2022, with some companies, like buy-now, pay-as-you-go provider Klarna, seeing their valuations fall by more than 85 percent. There has been little respite this year as layoffs continue at homegrown startups and Europe’s biggest tech outposts. At the end of February, Google confirmed that it would cut 200 jobs from its business in Ireland.
“The entire tech industry is suffering,” says Warner. “In general, 2023 rounds are taking longer. There’s a lot less capital.”
Against this backdrop, it is unclear whether any major European bank will be able or willing to fill the position vacated by Silicon Valley Bank.
“Silicon Valley Bank is unique. Banks that lend to start-ups are not that much,” said Reinhild Wegelers, a senior fellow at the economics researcher Bruegel and a professor at the Belgian university KU Leuven. “Typically, European banks are not a good option, because they are too risky.”
And even if a bank wants to take the risk, they’ll struggle to replicate a Silicon Valley bank’s deep knowledge of the startup ecosystem, Wegeler adds. “You need way more than deep pockets. You also need exposure to the entire capital market and the ability to do due diligence,” she said.
Silicon Valley Bank is prepared to take risks that other banks don’t, says Frederik Schubo, founder of Danish cloud company KeepIt.
KeepIt secured a $22.5 million debt financing package from Silicon Valley Bank’s UK business last year – by way of debt financing. Although the bank opened an office in Copenhagen in 2019, the branch did not have a banking license. Major Banks “If you’re having a deficit in the underwriting business, it’s ultimately unbankable,” Schouboe says. “The regulatory environment is too tight to help us.”
The way Silicon Valley Bank operates in Europe has won its admirers. But now those people worry that the company’s failure will warn other banks to similarly shy away from technology. Berthold Barek Karlich, founder and managing partner of Vienna-based investment firm Venionaire Capital, said it was SBV’s banking practices that failed, not its business model for funding the start-up sector. “What they did was they made a big mistake in risk management,” he added. “If interest rates rise, this should not cause your bank to fail.”
Baurek-Karlik believes European startups have benefited from risky bets Silicon Valley banks take, such as offering venture debt deals. The US and UK argue that the Silicon Valley bank is not systemically critical, with limited potential for spillovers to other banks. This can be true in banking, he says. But the system was critical to the technology ecosystem.