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March 16, 2023

What does the Silicon Valley Bank crash mean for digital health?

Commentary
Aoife Darling

The Federal Deposit Insurance Corporation (FDIC) decision to close SVB last week has had an immediate impact on startup and tech companies, including those in digital health. The closure has come at a time already fraught with uncertainty, as investments in digital health took a sharp decline over the past year. With rising interest rates, investors have become increasingly conservative with their investments, focusing on a more targeted investment strategy.

 

What led to the Silicon Valley Bank (SVB) bank crash? 

SVB catered for the financial needs of companies and individuals that found it difficult to access mainstream accounts, with a target clientele of tech startups and their founders. An estimated 50% of U.S-based startups had deposits in SVB, as well as companies in the UK, and Nordic countries. It was the 16th largest bank in the U.S., worth $16bn, until late last week, when it was closed down by California regulators in what was the largest U.S bank failure since the 2008 financial crisis. 

As the preferred bank for the tech sector, SVB’s customers grew exponentially throughout the pandemic, with deposits tripling as the startup and tech sector boomed. However, the nature of tech companies is to spend money, with investments or venture capitalist funding being used in the short-term to fund business growth. This is a much riskier business model for banking, when compared to deposits from individuals or more established companies, whose funds may be left for years or even decades. 

Like all banks, SVB invested a large proportion of these deposits, placing a reported $80bn of their $189bn of deposits into low-risk long-term mortgage-backed securities. Unlike the 2008 crisis, the stability of mortgage bonds was not the problem. The issue is that long-term liabilities were used to secure short term deposits.

Interest rates have an inverse relationship with bond prices, as interest rates have increased, bond prices have fallen. Coupled with this, the recent economic downturn has particularly affected the tech sector, leading many to withdraw funds. With deposits being withdrawn faster than anticipated, SVB was forced to sell some of its bonds at a low rate, taking a significant loss. On March 8th, SVB announced the sale of stock at a loss of $1.8bn, triggering customer withdrawals of $42bn, a quarter of the bank's total deposits, in a single day. SVBs stocks crashed by 60% on Thursday 9th of March and a further drop to 69% on Friday 10th caused regulators to close SVB. 

What happens now? 

In the U.S,  a Joint Statement by the Treasury, on March 12th it was stated that the Federal Deposit Insurance Corporation (FDIC) would fully protect all depositors of SVB U.S. Allowing all depositors access to all of their money from March 13th onwards. Investors in SVB however, are not as lucky with the value of the bank itself at 0; they will not see any returns on their investments. 

On March 13th, HSBC UK announced it was buying SVB UK for £1. The deal protected £6.7 bn in deposits.

 

What are the implications for digital health?

According to SVB Q4 financial highlights, 12% of the bank's deposits came from life sciences and healthcare. SVB was also a major investor in health tech, digital health and biotech companies, and for startups and investors. 

The SVB crash comes at a time when the digital health sector is already in uneven territory. Rising interest rates have slashed the previously easy access to capital that was fueling startup valuations and funding. Digital health funding, specifically, plummeted 48% in 2022, from record high levels in 2021; a five-year low for digital health funding. 

SVB was a critical financial partner for the startup community, with many VC firms also having funds tied up in the bank. VC funding has already become more conservative recently, with firms funding solutions that have established a potential return on investment. The closure of SVB has further sparked concerns in the digital health industry. 

The acquisition of SVB UK by HSBC has secured deposits and calmed the fears of startups and tech companies banking with SVB UK avoiding some of the issues faced by their U.S counterpart. In the U.S, SVB provided digital health startups with essential support to open a bank account, set up operations like payroll and loaned money to startups that didn’t have a positive cash flow. With the collapse of SVB, there is a need for other banks to fill the funding gap. Hopefully we will see traditional banks take more risk and support emerging healthcare startups to fill the void from SVB.

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