PitchBook Senior Analyst of VC Kyle Stanford joins Yahoo Finance Live to discuss the collapse of SVB, investor sentiment, and the outlook for startups amid a slowdown in the fundraising environment.
Video Transcript
RACHELLE AKUFFO: Silicon Valley Bank was the leading lender and banking partner for many successful venture startups. With the bank's collapse, venture funding is becoming harder to access, especially as investors shift their focus to higher quality targets. Joining us now to discuss the outlook for venture activity in the wake of SVB's collapse is PitchBook senior venture capital analyst Kyle Stanford. Thank you for joining me this morning, Kyle. I mean, when you look at the evolution of what led up to SVB's collapse here, what do you think needs to happen now with VCs?
KYLE STANFORD: I think one thing that VCs really need to do is take a little bit extra precaution when they're making these investments. We saw a huge run-up in deal value in 2021, obviously, leading to Silicon Valley Bank taking on more deposits. We've seen a very, very fast and swift slide of that deal value in the market over the past four quarters. We had $34 billion invested in Q4. We're looking at probably a little bit less than that in Q1 2023.
But what this bank collapse is going to do, hopefully, is increase the due diligence process of the investors into these VC-backed startups, which is going to continue to slow that funding. It's going to make it more difficult for these companies to raise capital even more difficult than it's already been.
RACHELLE AKUFFO: So, then, where are some of these companies looking to go? Obviously, being that SVB was such a pillar in the venture community, where are some of these companies looking to go?
KYLE STANFORD: Sure. Right now, their options are to go back to those equity investors or to find a new lender, right? We've talked to a lot of lenders that were in competition with Silicon Valley Bank or were later in the venture lifecycle. And they've had a huge number of inbounds over the past few quarters, looking for more loans. What that's going to do is increase the benchmarks for these companies to raise capital. It's going to be companies that are very strong.
And it's going to really bifurcate the market and make it really difficult for companies that aren't as strong to raise capital, either equity or debt. Strong companies with strong balance sheets, lots of capital runway, are going to be able to raise from equity investors or lenders, depending on how they want to go, and continue to grow in this market.
RACHELLE AKUFFO: And as you talk about that bifurcation, then, who are going to be the winners and losers at the end of all this?
KYLE STANFORD: The winners are obviously going to be the companies that have a really strong standing, are able to continue growing market share, and continue to innovate in this economy. Again, when we talk about the amount of capital that came into the market over the past couple of years, there are some companies that are sitting on really strong cash balance sheets. And that's going to allow them to continue to grow without needing to reenter the equity market into a much more formidable market than they last raised. Those companies are going to have an easy time continuing to grow, finding their niche, and really exploding their customer base to continue to raise capital and be successful in VC.
RACHELLE AKUFFO: And obviously, SVB being a regional bank, it somewhat understates the impact that it has not even just in the US, but also beyond as well, not just for tech, health sciences, and in other dimensions. What do people really need to understand about the impact of SVB's collapse?
KYLE STANFORD: Well, I think one figure that really stands out is that they banked for somewhere around 50% of the tech and life sciences companies in the US. That's a huge number. And that, again, like you mentioned, does not include the Israeli startups, the Indian-- India-based startups, startups around the globe that were banking with them. They had reached far into the venture market, really, obviously, increasing that exposure the market had to a single bank. But this was a bank not for Silicon Valley, even though its name might imply. So this was a bank for all startups around the world.
RACHELLE AKUFFO: And so, then, as you look at the selloff of some of these packaged assets, then what are your expectations there? And would that perhaps change as some of this calms down, or is this something that we're going to continue to see some reverberations?
KYLE STANFORD: I think, one, this is going to take a long-- this is going to be a long, drawn out process. I think when we look at the loan book that they had of early stage startups, that's really difficult for larger banks or other players looking to do deals. And it was hard for them to put a price on those. The warrants that these companies-- or that Silicon Valley Bank held, many of those companies are still private and have not yet been able to exit. And there's not really a good path for them. So this is going to be a long, drawn out process. And that's going to increase the caution and pressure on the venture market.
Again, this was a bank for not only VC-- or startups but VCs, for executives at many of these companies. This is a really intertwined bank with the venture market. And that's going to make it a very long, difficult process for the market to kind of unwind itself from the bank.
RACHELLE AKUFFO: And obviously, a lot of people looking perhaps for opportunities to buy, obviously, seeing some of the struggles as some of these companies try and find ways to get more debt on board. So what do you think that means in terms of what it means for the broader market and perhaps interest we might see an M&A here?
KYLE STANFORD: Again, I think this-- what we've seen, Credit Suisse taking out a large loan, First Republic trying to stave off a collapse, this is something that it was kind of a harbinger for what was happening in the banking sector, right? That's going to make everyone pause. It's going to increase the regulation and the kind of oversight on the broader market. And again, this is coming at a very bad time for not only VCs, but in the broader macroeconomic cycle. And we've seen public stocks take a hit for the past year. And this only adds to the pressure and difficulty that the market will have to kind of come out the other side of the cycle.
RACHELLE AKUFFO: Certainly the timing couldn't be worse, indeed. PitchBook senior venture analyst Kyle Stanford, thank you for joining me today.
