Start-ups in the ASEAN region are largely funded by local venture capital firms, and they bank locally too. However, SVB’s collapse could affect access to capital over the long term.
The recent collapse of Silicon Valley Bank (SVB), the 16th largest bank in the US and key source of funding for start-ups and venture capital (VC) firms, created panic in the start-up world this March as founders scrambled to access their deposits to make payroll. More uncertainty followed as the subsequent collapse of two more US banks – and of Credit Suisse Bank in Europe — roiled the markets.
To be sure, the US Federal Reserve and Federal Deposit Insurance Corporation quickly jumped to the rescue by guaranteeing SVB’s entire deposits. However, while ASEAN start-ups and VC firms were not immediately impacted by these developments, concerns are being raised about the longer term impact of the failure of this systemically important bank for the start-up world.
RISING RATES AND FUNDING WOES
Unlike the 2008 global financial crisis, SVB failed not because of credit but interest rate risk and duration mismatch between its deposit liabilities and bond assets. On the one hand, the value of its long-duration government-backed securities eroded following the sharp increase in interest rates by the Federal Reserve. On the other, its deposit growth turned negative. Start-ups withdrew money to meet their liquidity needs as both VC funding and tech initial public offerings (IPOs) became scarce and costlier with rising rates and falling valuations.
When SVB revealed that it had sold $21 billion worth of its securities at a loss of $1.8 billion and needed to raise $2.25 billion to shore up its balance sheet, it resulted in a bank run. Its highly concentrated and panicked customer base withdrew a staggering $42 billion in a single day.
The immediate impact was that start-ups across the globe, from the US and Canada to India and China, scrambled to access their funds to make payroll.
ASEAN START-UPS UNAFFECTED — FOR NOW
In the ASEAN region, however, the impact was minimal as most start-ups here have negligible exposure to SVB or its VC customers. That’s because they are largely funded by local VC funds — and bank locally, too.
Unlike SVB, ASEAN banks are less at risk of a sudden run on deposits because of a stronger regulatory environment, comfortable asset mix, and diverse customer base.
Also, while some Asian VCs like Jungle Ventures and Golden Gate Ventures did bank with SVB, again their exposure was minimal. For instance, according to Golden Gate Ventures, less than 1% of its funds were banked with SVB.
Hence, many VC firms in the ASEAN region don’t expect the SVB collapse to hurt fundraising for tech startups in the near term. However, they point out that it could prolong the funding winter over the medium term.
Remember, start-ups globally have faced a tough fund-raising environment over the last year owing to collapsing valuations, a shrinking tech IPO market, and reduced early and late-stage funding.
While a majority of venture funds in countries from Malaysia to Singapore to Thailand comes from local institutions and individuals, capital could become harder to access in the longer term. American investors invested in local VC funds could halt or delay investment flows to emerging markets. This could affect growth-stage fund-raises, secondary sales and acquisitions at a time when start-ups are already facing recessionary fears.
SVB’s value lay in the fact that it provided both access to the US capital markets and also networking opportunities in Silicon Valley. It also understood how start-ups operate and the risks of being a venture-backed company.
ASEAN banks may not be able to provide this reach, but there could be an opportunity for them to offer banking products and services to local start-ups looking for more reliable and better capitalised banking partners. Moreover, countries like Singapore could also emerge as a stronger haven for start-up focused capital and talent.
Another big positive fallout is that the uncertainty caused by the SVB collapse along with the existing tight funding environment is compelling start-ups to trim costs and preserve cash. Since the days of easy money are over, they are learning to cut their burn rate to extend the cash runway, and also focus on profitability.
In addition, start-ups are realising the benefits of good regulation and a stable banking regime — and that they should not put all their eggs in one basket.
LESSONS AND OPPORTUNITIES FROM SVB COLLAPSE
Marlon is the Manager – Strategy and Planning based in Jakarta, Indonesia. He obtained his Master of Arts degrere in Transport Policy and Planning from The University of Hong Kong (HKU)
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