- Technology funds continue to sell off
- Advertising and software spending will fall as start-ups rein in costs
Technology sector valuations have been badly hit by the collapse of Silicon Valley Bank. Although depositors in both the UK and US will now be paid back in full, share prices for growth-focused technology companies and those with exposure to the technology sector continued to fall on Monday morning.
The risk of Silicon Valley Bank’s customers not being able to make payroll has gone. In the US, regulators said over the weekend that all SVB’s depositors with would be fully repaid. Meanwhile, on Monday HSBC agreed to acquire the UK arm of the bank for a nominal £1.
However, investors are still fearful of the long-term consequences for the tech sector. SVB was of central importance in the technology ecosystem and its sudden collapse will tighten lending conditions across the sector. Nearly half of US venture-backed technology and life science companies and 44 per cent of 2022 venture-backed IPOs banked with SVB.
On Friday, chief executive of venture investor Y Combinator Garry Tan referred to the collapse of SVB as an “extinction level event for start-ups, [one that could set companies] and innovation back by 10 years or more”. By Sunday, he said "we're not through it yet" but thanked the US government for "decisive action".
There were two key reasons SVB failed. One was its over-exposure to lossmaking technology start-ups. Rising interest rates dried up venture capital funding last year and this forced SVB's depositors to dig into cash reserves: total client funds swung from an inflow of around $40bn (£33bn) a quarter in 2021 to an average quarterly outflow of $14.5bn in 2022. The other was its massive exposure to US Treasury bonds - to cover outflows it had to sell a portion of these for a loss last week - having previously held them on a mark-to-maturity basis on its balance sheet - triggering the need for a capital raise and then the bank run.
The overall VC trend is worth digging into, as it has continued into 2023. In its latest quarterly report, SVB said US quarter-on-quarter VC investment was “on track to decline 15-20 per cent” and there was also a further $18.6bn outflow of customer funds. This outflow turned to a rush on Thursday evening after the bank announced its capital raise. But the bank's collapse wasn’t a freak event in terms of catalysts: issues caused by rising interest rates and funding issues for SVB’s cash-burning clients were emerging throughout the last year.
These funding issues will only worsen as the collapse of SVB shines a light on the risk of lending to cash-burning businesses. Listed venture capital fund Molten Ventures (GROW) is down 24 per cent in the past five days. ARK Innovation ETF (US:ARK), which is exposed to array of such companies in the US, is down 11 per cent over the same period.
The larger, cash-generative tech companies such as Meta (US:META) and Alphabet (US:GOOGL) will be fine in terms of funding. However, a lot of their customers are technology companies which spend their VC cash on prominent advertising space and the like.
Investors' Chronicle understands that Meta halted advertising for SVB clients over the weekend when the bank's deposits weren’t accessible. The advertising should have restarted on Monday after the US regulator agreed to cover the deposits, but there will be downward pressure on advertising revenue as start-ups continue to cut spending. Meta and Alphabet’s share prices are both down 3 per cent in the past five days.
Software and cloud computing companies that have VC-backed start-ups as customers will be facing the same issues.
"As these VC-backed businesses focus on near-term survival, their management teams will clearly look to quickly further optimize cloud usage, limit new workload growth, and likely undertake additional headcount reductions, " said broker Stifel. It estimates that VC-backed businesses account for around 10 to 15 per cent of the revenue at high-growth listed software companies.
Baillie Gifford's Scottish Mortgage Investment Trust (SMT), which has exposure to unlisted technology companies and holdings in SVB customers such as Wise (WISE) and Roblox (US:RBLX), fell again yesterday morning before recovering, and is down around 5 per cent since Friday morning. Chrysalis Investments (CHRY), another listed vehicle that owns unlisted companies such as Klarna, was down as much as 6 per cent before closing 2.5 per cent lower.
