The NZ tech scene was reeling over the weekend, with people trying to gauge the impact of Silicon Valley Bank’s collapse.
US regulators took control of SVB - which had assets of US$300 billion before its failure - freezing access to its accounts after a run on its funds Saturday NZT. SVB was the 16th largest bank in the US, and the country’s second-biggest banking collapse, at least if you don’t allow for inflation.
This morning, a degree of calm and clarity was restored, as the heads of the US Treasury, Federal Reservice and Federal Deposit Insurance Corp said in a joint statement that SVB depositors would regain access to funds on Monday morning US time, with all funds - both insured and uninsured - guaranteed by the US Government.
The Fed also announced an emergency lending facility to shore-up the US banking system and stop SVB from becoming a contagion. (At the same time, regulators shut a smaller bank, the 38-branch Signature Bank, which had been hobbled by a bad crypto bet.)
Ahead of this morning’s announcement, the US tech scene is split on the impact. Garry Tan, CEO of Y Combinator - the highest-profile business incubator in the US, whose graduate firms who bank with SVB have a combined 267,000 employees - posted: “This is an extinction-level event for startups and will set startups and innovation back by 10 years or more”.
But one of the largest American venture capital firms, Khosla Ventures - a backer of NZ firms including Rocket Lab, and LanzaTech - told the Wall Street Journal it believes SVB is “fundamentally sound”. Kholsa thinks the bank will survive its current crisis and that deposits and securities stored at SVB would be safe for most of its companies, despite its collapse (although it also reiterated two key bits of advice: that startups should hold at least three months cash, and that they should spread it across multiple institutions a la Rocket Lab).
Before this morning’s announcements, a secondary market is splitting the difference. The FT reports that uninsured SVB deposits are selling for between 55c and 75c on the dollar.
There were lucky escapes. Straker Translations CEO Grant Straker told the Herald his Auckland-based firm - which has customers and offices in North America - held up to $2 million in cash in SVB at any one time. But it switched to another US bank last year after a spat over whether payments to Ukrainian translators broke US sanctions.
Others, like NZ citizen Peter Thiel’s Founders Fund - which has investments in multiple NZ startups - withdrew all their funds within hours of regulators closing SVB’s doors, according to a Bloomberg report. And the Herald understands that Crimson Education pulled its money out just 30 minutes before regulators froze SVB’s funds.
Some weren’t so lucky as the rumours about SVB fuelled a run on its funds that made the chatter a self-fulfilling prophecy.
The California-based, Nasdaq-listed Rocket Lab, has US$38 million or 7.9 per cent of its cash and equivalents tied up in SVB.
Icehouse Ventures chief executive Robbie Paul told Markets with Madison that Kiwi-owned start-up companies, including a handful of Icehouse portfolio companies, likely had “in the order of NZ$100m” caught up in the collapse, with much of it in accounts above the US$250,000 threshold for Federal Deposit Insurance.
NZX-listed IkeGPS disclosed this morning it has US$3.2m ($5.3m) held at SVB (of total cash of $19.6m). Of that US$250,000 was covered by Federal Deposit Insurance.
Another NZX-listed firm, Comvita, said its skincare joint venture in the US, Caravan Honey, banks with the Silicon Valley Bank and has lost access to $2.5m in funds.
A third NZX-listed tech company with business in the US, travel software company Serko, said it had no funds with SVB. Neither did NZX-listed Vista Group or Rakon.
And the Wellington-based but ASX-listed Xero disclosed this morning that it has US$5m in SVB.
Privately held Dexibit - an Auckland firm that provides data analytics for visitor attractions - said it had US$250,000 with SVB, and split is remaining cash held in the US with other banks, sticking to the deposit insurance threshold.
Punakaiki Fund director Lance Wiggs said NZ startup exposure would be the exception rather than the rule, however.
The 17 local early-stage technology companies his fund backs (worth a collective $97m) have most of their cash stored in NZ.
Regardless of the immediate direct effects for those with funds in SVB, Wiggs and others see three major flow-on effects.
US venture capital firms have played a key role in New Zealand’s startup funding scene, both through putting money into local startups - lately often through co-investments with the Crown-backed NZ Growth Capital Partners, which operates the $300m Elevate fund - and by offering access to their networks and connections.
Silicon Valley outfits like Peter Thiel’s Founders Fund (which pulled its cash from SVB shortly before its collapse) and Khosla Ventures often feature in funding rounds by firms gearing for global expansion, along with various New York-based funds.
“While NZ start-ups have limited exposure to the SVB collapse a bad outcome across this weekend will very much impact start-ups and VCs everywhere in the world,” said Lovina McMurchy, who worked for Amazon and Microsoft in the US before returning home to become a partner with NZ’s largest venture capital firm, the Wellington-based Movac for three years before recently returning to North America.
“If the bank stays in receivership as opposed to getting purchased, this will mean a large number of US start-ups may need to be seriously contracted or fully shut down over coming months,” McMurchy said.
“US VCs will focus their attention on helping their existing companies through the crisis as opposed to new funding.
“VC funding in 2022 was already down by around 30 per cent vs 2021 and we could expect 2023 to further slow down.
“In times like these VCs also concentrate their investments closer to home and so any NZ start-up looking to raise in the US may find that very difficult.”
Australia’s big three venture capital firms - Blackbird, AirTree and Square Peg - have all confirmed they hold exposure to SVB.
Their exposure is expected to have blow-back on the venture capital scene across the Tasman, and the trio have all invested in multiple NZ startups - often co-investing through NZ Growth Capital Partners (NZGCP).
A venture capital insider told the Herald: “My expectation is that the NZ VC total fund size across all VCs will shrink due to the timing of the raises relative to when interest rates went up.
“Compare this to the Aussies who all figured out what was happening and got their raises done earlier. Both Blackbird and Airtree have closed $1 billion funds and reflecting growth versus their previous funds. I expect NZ VC funds to shrink and that means New Zealanders will be more dependent on Aussie money, and Aussie VCs will take a more dominant and significant position in funding NZ startups.” (The Herald has asked several local funds for comment.)
If that did transpire - then a potential counter-balance would be the Crown topping up NZGCP, a move that could also serve as an indirect move to bolster NZ startups who get in strife due to the SVB failure.
NZGCP’s $300m Elevate Fund was established in early 2020 - primarily through a $240m contribution from the NZ Super Fund - to spruik the sluggish NZ VC scene.
But now most of that $300m has been invested, and the Government has yet to decide whether to put another $300m into Elevate. In fact, NZGCP has yet to even receive full funding for its first investment cycle, which saw it actually receive $269.5m; the balance of funding could arrive with Budget 2023.
The SVB shock could prove the catalyst for Elevate finally getting a top-up - but this morning NZGCP was not counting its chickens.
“We are assessing the immediate and longer-term impacts of SVB being taken into receivership by the FDIC [Federal Deposit Insurance Corporation]. Given SVB’s prominent role in providing banking services to the global VC and start-up sector, there will be a lot of uncertainty within the sector about the longer-term impact,” NZGCP chief investment officer James Pinner told the Herald this morning:
“For those NZ companies and VC firms with funds in SVB above the US$250,000 insured amount, this will be a stressful time and we are reaching out to our ecosystem partners at the moment. We await developments in the US but we are conscious that a bank resolution takes significant time and effort.
“We don’t immediately see it changes the funding needs of Elevate or Aspire [ NZGCP’s smaller seed fund] but it does show that the VC sector globally is facing some challenging times and we will continue to monitor this situation very closely over the coming weeks and months.”
“It’s a very serious situation and everyone in the US tech community is both shocked and worried. Running a start-up is a really hard job at any time and you just don’t expect to have to navigate a cash crunch driven by your bank failing. It’s quite astounding actually,” McMurchy said.
But the tech veteran sees ramifications beyond the startup and VC scenes.
At this point, it’s unknown if SVB will be bailed out, or if it will prove unsalvagable, potentially causing a domino effect that sees other banks fall over.
“If the outcome is bad then this may be the tipping point into a recession making it more difficult for companies to hit their revenue growth milestones,” McMurchy said.
And if a company is not performing, it will stand little chance of raising funds amid what could, in the worst-case scenario, become a GFC 2 (McMurchy made her comments before Treasury and the Fed announced their measures Monday morning NZT).
Treasury Secretary Janet Yellen is taking a hardline on bailing out SVB itself, even as the Fed has extended emergency lending to prevent a run on other banks, and depositors have been promised access from Monday morning.
Yellen told CBS that the situation was not like the GFC. The tech-heavy SVB’s problems were isolated and tied to the tech downturn.
Overall, “The American banking system is really safe and well-capitalised,” she said. “It’s resilient.”
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