SVB logo on building facade.

Collapsed firms Silicon Valley Bank and Silvergate Capital catered to the specific financing needs of tech start-ups and crypto firms. Who understands their needs now? Anita Hawser reports.

In light of the collapse of Silicon Valley Bank (SVB) in the US, the merger of SVB UK with HSBC’s ring-fenced bank, and the collapse of two US-based crypto-focused providers, Silvergate Capital and Signature Bank, do technology companies still need a dedicated bank?

Many who have watched the domino effect unfold over the last few weeks, which saw US tech-focused banks fall, one after the other, might argue it was these banks’ razor-sharp focus on certain segments of the tech community that ultimately contributed to their demise.

In the case of SVB in the US, which banked almost half of US venture-backed tech and life-science companies, some reports suggest it was those in the venture capital community that ultimately contributed to the bank’s undoing by pulling their deposits, and transmitting news of the rout online in chatrooms and WhatsApp groups

On March 26, more than two weeks after the bank’s collapse, the Federal Deposit Insurance Corporation announced that North Carolina-based First Citizens Bank would acquire most of SVB’s assets in the US. In a statement, First Citizens Bank said the acquisition would build on its experience with innovation hubs by leveraging SVB’s strength in serving the private equity, venture capital and technology sectors.

“The transaction brings together complementary strengths of both banks’ middle market commercial banking and private banking capabilities and leverages common platforms, vendor partners and technologies,” First Citizens Bank stated. 

But SVB was not just any bank. It was one of the “most active venture debt lenders”, alongside venture capital investors in both tech and life sciences/healthcare, which enabled fast-growing and investor-backed start-ups to access capital with less dilution. “Part of the reason we used SVB [UK] in the first place is that they catered to start-ups whereas traditional banks didn’t,” one of SVB UK’s customers told The Banker.

Part of the reason we used SVB [UK] in the first place is that they catered to start-ups

Will Rhind

“We understand the financial requirements of these companies,” says a spokesperson for SVB UK. “They will burn through cash and go through multiple rounds of financing. We support their runway and help reduce dilution.”

But given the “tenuous state” of SVB in the US, analyst firm CB Insights predicts it will change the accessibility of venture debt, which could have profound implications on start-ups, investors and the private markets in terms of lower tech valuations, more start-up failures and greater lay-offs.

Following the collapse of SVB in the US, its UK operations were sold to HSBC. According to a statement published by HSBC, the UK bank had loans of around £5.5bn and deposits of around £6.7bn. For the financial year ending December 31, 2022, SVB UK recorded a pre-tax profit of £88m. 

The assets and liabilities of SVB UK’s parent companies were excluded from the HSBC deal. HSBC CEO Noel Quinn said the acquisition made “excellent strategic sense” for its business in the UK. “It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life science sectors, in the UK and internationally.”

SVB UK 100% focused on the innovation economy

However, Anthony Watson, founder and CEO of the Bank of London, a clearing, correspondent and wholesale bank and one of the bidders for SVB UK’s assets, believes HSBC bought SVB UK primarily because of the ring-fencing benefits it got with the deal. Ring-fencing requirements were relaxed for HSBC UK so it could take on SVB’s corporate deposits.

“HSBC has a balance sheet of more than $2tn. In that context, the SVB UK transaction value itself looks like a rounding error,” he says. “HSBC’s UK business model is mature. It’s obvious that if it wanted to play in [tech start-ups] it could have done so many years ago. The true prize is the ring-fencing concessions it received, which cannot be overstated.”

A spokesperson for SVB UK says its vision and mission have not changed since it was acquired by HSBC. “Early stage clients are still interested in coming to us. Conversations haven’t really changed. It’s about wholesale innovation and helping our clients to be successful. We’re 100% focused on the innovation economy. Our teams are out there and the support from our ecosystem has been really positive. 

“People are pleased we’re back in business and we now have a parent which is one of the largest banks in the world that will help support us with future growth.”

But it was not just the world of tech that mourned the loss of a major banking player in the past couple of weeks. Silvergate Capital, which went into voluntary liquidation on March 8, was one of the few banks globally that serviced the needs of crypto firms. It was heavily exposed to cryptocurrency exchanges like FTX, which collapsed last November.

Around the same time as FTX’s fortunes were waning, investors started shorting the bank’s stock. Did Silvergate bet too heavily on crypto?

Mr Watson from the Bank of London says the problems at Silvergate were not that it supported the fiat leg of cryptocurrency transactions, but because it lent to crypto firms and in some cases appeared to allow fiat leverage of crypto assets. “Despite all the talk, [cryptocurrencies] lack any real utility,” he says.

“They’re only really used for speculation and trading. The moment any firm starts to leverage or lend against a ridiculously volatile asset class, or indeed to firms that are 100% dependent on these asset classes, it is game over.”

In March 2022, just months before FTX imploded, Silvergate Bank, a subsidiary of Silvergate Capital, issued a $205m term loan under its Silvergate Exchange Network (SEN) Leverage programme to analytics and business-intelligence firm MacroStrategy, a subsidiary of MicroStrategy. The loan was collateralised by bitcoin. As of December 31, 2021, SEN Leverage had grown to approximately $570.5m in commitments.

“The SEN Leverage loan gives us an opportunity to further our position as the leading public company investor in bitcoin,” said Michael Saylor, chairman and CEO of MicroStrategy. “Using the capital from the loan, we’ve effectively turned our bitcoin into productive collateral, which allows us to further execute against our business strategy.”

Silvergate also built an Exchange Network to allow institutional investors to move fiat currencies such as dollars and euros to digital currency exchanges and trading partners in real time, 24/7. 

The need for dedicated players is even larger now 

Dirk Klee, CEO of Bitcoin Suisse, a crypto broker based in Zug, Switzerland, says the collapse of crypto-friendly banks like Silvergate Capital will see market participants revert to even higher-quality service providers.

Mr Klee, who previously worked in wealth and asset management, says Bitcoin Suisse works with banks in Switzerland and Liechtenstein. “We spread our risk across many counterparties. It’s about diversification, which is a core element of our operations. I’m sure other market participants are reaching out to specialised and well-capitalised banks.”

The need for dedicated players like us is even larger now

Dirk Klee, Bitcoin Suisse

However, it was not always easy for firms like Bitcoin Suisse to find banks that were willing to take its business when the company  started in 2013. Mr Klee, who only became CEO last April, says most major banks today are building the infrastructure to support digital assets. “I see that continuing,” he says, although he anticipates that due diligence requirements from banks could increase in light of recent events.

But he says that the interest-driven events of the past two weeks in the US and European banking sectors had nothing to do with crypto. “This is more about banks not properly managing their balance sheet,” he says. “We don’t have long-dated bonds that need to be written down. That’s a banking problem right now.”

Given the events of the past couple of weeks, Mr Klee says Bitcoin Suisse’s intent to reapply for a banking licence has increased. It applied for a licence a few years ago in Switzerland, but did not move forward with its application. “There’s a lengthy process that comes with that,” says Mr Klee. “We are aspiring to apply for a banking licence and to go for the highest regulation. We want to establish ourselves as a high-quality, dedicated institution. The need for dedicated players like us is even larger now.”

What is so different about crypto is that it operates in a 24/7, decentralised world, says Mr Klee. “For a traditional bank that wants to be closely involved in crypto, I think this would be difficult to manage. The concept of running your business 24/7, of having people in the office all the time, has not yet been established within traditional banks. We have to act immediately. That’s our way of working. This requires different talent, motivation, and incentives.

“You have to live and breathe this [crypto] inside out.”



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