AUSTIN, Texas—South by Southwest, the annual music, film, arts and tech festival that takes over Austin for 10 days, draws tens of thousands of people to showcase innovation and creativity along with plenty of parties and pop-ups.
There were still party vibes and long lines for events at SXSW this past weekend. But the festival kicked off the same day as news that Silicon Valley Bank, a financial hub for startups, had been placed under the control of the Federal Deposit Insurance Corp (FDIC). The news of SVB’s collapse seemed to be the elephant in the room at the conference, in hushed offstage conversations among startup founders, investors and healthcare and life sciences executives as attendees constantly checked their phones.
Other times, it was front and center during onstage interviews.
23andMe co-founder and CEO Anne Wojcicki responded to the evolving SVB situation during a keynote interview onstage Friday.
"We don’t have any exposure there, but I remember living through Lehman Brothers and the market collapse in 2008. This is the third time around seeing this," she said. "It's unfortunate how it can take down companies. We are living in a time when companies need to be fiscally responsible and mindful of how they are using their cash. Investors are not interested in money-losing businesses."
SVB was a major investor in health tech, digital health and biotech companies and for startups and investors. According to data on its own website, SVB says it backs nearly half of all U.S. venture-backed startups, and 44% of the U.S. venture-backed technology and healthcare companies that went public in 2022 are SVB clients.
SVB had about $209 billion in total assets and about $174 billion in total deposits as of Dec. 31, 2022.
SVB was also a bank to more than 2,500 venture capital firms, including Lightspeed, Bain Capital and Insight Partners, The New York Times reported.
Several startup founders at the conference told Fierce Healthcare off the record that their companies had no or limited exposure.
But anonymous sources also mentioned digital health companies that had “significant” exposure and couldn’t get access to their deposits.
Garry Tan, president and chief executive of Y Combinator, a startup accelerator in SVB, told The Wall Street Journal Friday that many of its roughly 3,000 active companies had a relationship with SVB. Y Combinator surveyed those companies Friday morning and by Friday afternoon, nearly 400 had said they had exposure and over 100 said they worried they couldn’t make payroll over the next 30 days without a quick resolution for the bank, the WSJ reported.
The bank's sudden collapse rattled a startup industry struggling with an economic slump, a sharp downturn in VC funding and rising interest rates, which have driven layoffs and cost-cutting measures at some companies.
Digital health funding plummeted 48% in 2022 from record-high levels in 2021. Startups pulled in $15.3 billion in funding dollars last year, just over half of 2021's blockbuster $29.3 billion, according to Rock Health, a venture fund dedicated to digital health.
By Sunday afternoon, news came that the Federal Reserve, the Treasury Department and the FDIC were stepping in to ensure all depositors at the failed bank have access to all their money, a move intended to avert a financial crisis. Depositors will have access to all their money beginning this morning, the regulators said.
There was a collective sigh of relief Sunday among venture capital firms and startup founders, many of whom spent the weekend scrambling to find out when deposits and financing will be returned as they faced pressing concerns like making payroll in the coming week.
Relieved that FDIC has protected deposits. Continuity for thousands of companies & paychecks for millions, at 0 taxpayer cost. Must figure out how the critical services SVB provided for tech/vc thrive in SVB/successor. Proud of industry collaboration to catalyze this outcome.— Hemant Taneja (@htaneja) March 12, 2023
In off-the-record conversations at SXSW, many people in the health tech and digital health worlds said the reverberations of the SVB collapse would be felt throughout the startup ecosystem as it would impact companies' ability to pay vendors and suppliers. Many VC firms also had money tied up with the bank.
In the days and weeks to come, there will be plenty of time for tech startups and investors to analyze SVB's implosion and how it might change startup banking.
Throughout the weekend, SVB's collapse played out in real time on Twitter and other social media sites. It's clear that behind the scenes there was plenty of finger pointing at the bank and the way it communicated its liquidity problems and at depositors who panicked and pulled their funds out right away.
"This is the first bank run we've ever had in the era of social media, right? And even in 2008, Twitter, Facebook, they might have existed, but just barely," Bradley Tusk, co-founder and managing partner at Tusk Ventures, told Fierce Healthcare on the sidelines at SXSW. "So all the things that create a panic are so accelerated once you have the panic of Twitter, once you have the panic of Slack and everything else."
"I think as the regulators look at the fallout here and figure out things like should the 'stress test' rate level be changed, should the mark-to-market rules around long-term treasuries be changed? All kinds of banking regulations to think about," Tusk said. "Another one is, how do you account for social media? What if you said, if there's a 25% spike in Twitter traffic about a financial institution's name, the platform has to call the FDIC and just say, 'Look, just so you know, be aware, maybe it's nothing, but maybe it's a sign of a real problem.' No one has yet to think about this connection because it wasn't a problem until it just became a problem this week."
He added, "I hope that as we think about all the different ways to change it, if you ignore the social media angle, you could fix every other thing and still be in the exact same position."
Adrian Aoun, CEO and founder of healthcare startup Forward, said the company banks with SVB but was not in a cash crunch as a result of the bank being closed down.
"There are some people out there gloating right now. [SVB] fuels innovation and they've helped an enormous amount of founders and startups, including ours. We are all going to lose here," he said on the sidelines of SXSW.
Aoun said he was frustrated and disappointed with how SVB communicated the situation last week and the difficulty customers had with withdrawing capital.
"I think that the way that they handled customers asking for their money back was far from ideal and should be examined. If you're in the business of managing people's money, you have to have a very high bar of ethics in how you do so," he said.
Aoun also said he's concerned about the impact on startup funding going forward with SVB's position as a critical financial partner to the startup community.
"If the funding markets for startups get more conservative, then startups have to get more conservative. And we don't want that; we want more startups trying more aggressive and more ambitious sorts of things. The more ambitious you are, by definition, the riskier you are," he said.
As the SVB fallout played out on Twitter throughout the weekend, there was also talk about collaboration and cooperation among VC firms to help portfolio companies make payroll with very low or no interest loans.
In a tweet, General Catalyst CEO Hemant Taneja said more than 400 VC firms signed on to support SVB. "[SVB's] role in global ecosystem is critical for our industry/world to continue responsible innovation and supporting vibrant economy," he tweeted.
Sunday: In last 36 hrs, 400+ VC firms w/ trillions in AUM signed on to support @SVB_Financial. Role in global ecosystem is critical for our industry/world to continue responsible innovation & supporting vibrant economy. More tk; support not stopping here https://t.co/YtbYpyILnl— Hemant Taneja (@htaneja) March 12, 2023