Silicon Valley Bank’s Failure Deals A Blow To Europe’s Startups
Posted On March 14, 2023
Silicon Valley Bank’s struggles started with a bad bet on long-dated US bonds. Rising interest rates meant that the value of those bonds fell. As depositors started to worry about the bank’s balance sheet, they pulled their money out. High interest rates have become a challenge across the industry, ending the cheap loans that tech companies got used to over the past decade and reducing available funding.
More than $400 billion in value was wiped from Europe’s tech industry in 2022, while some companies, like the buy-now, pay-later provider Klarna, watched their valuation plunge more than 85 percent. This year there’s been little reprieve, as layoffs continue within local startups as well as at Europe’s big tech outposts. At the end of February, Google confirmed it would cut 200 jobs from its business in Ireland.
“The whole tech industry is suffering,” Warner says. “Generally, in 2023 rounds are taking much longer; there’s much less capital available.”
Against this backdrop it’s unclear whether any major European bank is able or willing to fill the niche that Silicon Valley Bank is leaving.
“Silicon Valley Bank is unique. There are not that many banks which provide startups loans,” says Reinhilde Veugelers, a senior fellow at economic think tank Bruegel and a professor at Belgian university KU Leuven. “Typically, European banks are not good alternatives, because they’re way too risk-averse.”
And even if a bank wanted to take the risk, they’d likely struggle to replicate Silicon Valley Bank’s deep knowledge of the startup ecosystem, Veugelers adds. “You need way more than deep pockets. You also need to be sufficiently close to the whole venture capital market and have the ability to do due diligence” she says. “If the bank had that capacity, it would have already been doing this.” HSBC did not immediately reply to WIRED’s request for comment.
Silicon Valley Bank was prepared to take risks that other banks wouldn’t, says Frederik Schouboe, co-CEO and cofounder of the Danish cloud company KeepIt.
KeepIt secured a $22.5 million debt financing package—a way of raising money through borrowing—last year from Silicon Valley Bank’s UK business. Although the bank opened an office in Copenhagen in 2019, the branch did not have a banking license. Mainstream banks “are ultimately impossible to bank with if you are making a deficit in a subscription business,” Schouboe says. “The regulatory environment is too strict for them to actually help us.”
The way Silicon Valley Bank operated in Europe has earned its admirers. But now those people are worried the company’s collapse will warn other banks away from funding tech in the same way. It was SBV’s banking practices that failed, not the business model of funding the startup sector, says Berthold Baurek-Karlic, founder and managing partner of Vienna-based investment company Venionaire Capital. “What they did was they made big mistakes in risk management,” he adds. “If interest rates rise, this shouldn’t make your bank go bust.”
Baurek-Karlic believes European startups were benefiting from the riskier bets that Silicon Valley Bank was taking, such as offering venture debt deals. The US and UK said Silicon Valley Bank is not system critical, arguing there was limited risk of contagion to other banks. That might be true in banking, he says. “But for the tech ecosystem, it was system critical.”