TechTalk: Silicon Valley Bank collapse could see ‘contraction of capital’ – but for now it’s business as usual

US lender Silicon Valley Bank (SVB) collapsed on the 10 March 2023, but the UK government moved quickly to swoop in and secure a rescue deal two days later that saw HSBC buy the bank’s UK arm for the symbolic amount of £1.

Although this rescue deal was met with relief by many British startups and insurtechs, as it saved them from major losses, there remains an air of trepidation because many UK insurtechs are backed by US investors.

Louise Birritteri, chief executive and founder of Pikl and board member of Insurtech UK, told Insurance Times: “As far as I know, everything is continuing with business as usual in the UK, but those with funding in the US might struggle to get that.

“I am a customer of SVB as Pikl and there is certainly still a gap in the startup and technology sector, because their product is more tailored to what we need than the traditional banking sector. This is why many technology companies have chosen to bank with SVB, Pikl included.”

According to Julian David, chief executive of technology trade association TechUK, SVB’s UK arm boasted over 3,000 clients in the startup and scaleup sector and fulfilled a role as an investor and primary bank for these firms.

He said that while the mantra of “keep calm and carry on” might have served as useful in some instances, it was the wrong attitude to take in this instance. David welcomed the fast response from the UK Treasury and secretary of state to facilitate the resale of SVB UK.

He added: “It has been a turbulent time for UK tech after a difficult economic backdrop throughout 2022 – with companies facing many adjustments to business models – but [the UK tech sector] remains a place of opportunity.

”As the engine of growth for the UK, it has the ability to address the challenges we face in the UK.”

Despite HSBC’s buyout of SVB UK, many firms remain nervous of the impacts its parent bank’s collapse may cause.

Birritteri explained: “It is likely we will see a contraction of capital in those US markets where you have venture [capital] firms helping startups to plug the gaps [left by not] being able to access funds and loans through SVB.

”It’s most likely those venture firms are going to look after their own portfolio companies first before they then look to do new investments, which means there might be a contraction then for those looking to raise new investments in the US.

Birritteri predicted a potential “ripple effect” from this, with funding disruption over the coming weeks as firms struggle to get business back on track.

“One of the challenges I’ve heard is that, for some US-based startups that have had venture loans through SVB, it is unknown whether they will be able to draw on those facilities in the US because there hasn’t been a takeover of SVB,” she added.

The US government is now looking to facilitate a sale of SVB’s parent company called SVB Financial Group, which filed for chapter eleven bankruptcy relief in the US on the 17 March 2023.

Meanwhile, HSBC is now planning to rebrand SVB’s UK arm – potentially as a standalone brand.

Two days after SVB’s collapse, Signature Bank in the US became the next casualty as depositors spooked by SVB’s fate withdrew large sums of money. Following this, Switzerland’s Credit Suisse bank saw its shares fall but Swiss competitor UBS swooped in with a takeover deal on 19 March 2023.

For Birritteri, the current situation made for “an interesting time in the banking sector,” with the next few weeks set demonstrate how widespread the potential fallout from SVB’s collapse will be.

Massive nervousness 

Birritteri added that there remained “a massive amount of nervousness” for UK insurtechs that had funds in SVB.

Speaking about Pikl’s experience, Birritteri said: “We were quite fortunate that we only had very low exposure [to SVB] that didn’t cause us any trading issue.

”It would have been catastrophic had we not had an intervention from the UK government.”

She noted that since the mini budget last year “the venture capital market has been in a very cautious place – and that insurtech investment or technology market investment was at its lowest level”.

Gallagher Re’s quarterly Global Insurtech Report for Q4 2022 revealed that insurtech funding dropped to its lowest level since Q1 2020, plummeting by 57% quarter-on-quarter – a $1.01bn (£813m) fall.

Birritteri added: “Because the stock market has dropped so much, venture capital firms are having to evaluate investment differently as a result. But things started to bounce back and at the beginning of this year we saw more big investment raises.”

Two examples are Superscript, which raised £45m in January, and Flock, which raised £31m in February 2023. 

On the issue of long-term insurtech funding, Birritteri remains positive.

She added: “Despite everything that has happened in the economy over the last six months, insurance is quite recession proof.

”Most [Insurtech UK] members are thriving. We are still at the beginning of the insurtech journey – there’s a lot of talent, particularly in the UK with our long history of being a leader in insurance.”

Lack of diversification assets

Birritteri noted that the UK has not seen inflation or interest rate hikes in this way for 30 years or so.

On 23 March 2023 the Bank of England raised the UK interest base rate by a 0.25 percentage points to 4.25%, in response to higher than expected inflation in the UK.

Birritteri continued: “It looks like some of those banks have been a little bit unprepared for this. Plus, you have the nervousness of depositors taking out cash because they have seen [banks fail].”

An important element of the HSBC rescue deal for Gabriel Estevez, partner at international law firm Taylor Wessing, was the fact that SVB was split into two legal entities – one in the US and the other in the UK.

Estevez explained: “This separation meant that SVB UK was, and is, regulated by the Prudential Regulation Authority (PRA), thus permitting key stakeholders from the UK tech sector to directly assist the PRA and the government in achieving the best result for the technology ecosystem in the UK.

“SVB’s lack of diversification of assets certainly contributed to the sudden loss in confidence, but its narrow business model is also why it was so successful. It’s hard to say at this stage what the future holds for SVB from an operational perspective.

“It’s possible HSBC could choose to change the way the SVB subsidiary model works and change the way startups operate accounts.

”If so, we expect enquiries from startups asking if they should agree to these new terms and more borrowers across the venture debt space will be questioning whether they should both bank with, and borrow from, the same lender.”