While SVB was the 16th largest U.S. bank and second-largest bank failure in U.S. history before it closed last week, those numbers don’t tell the whole story.
SVB was the bank for tech, biotech, digital health companies and venture capital firms, banking with nearly half of U.S. venture-backed healthcare and tech IPOs, as well as nearly half of venture-backed tech and life sciences companies. It was popular with startups and venture funds because it can be more difficult for early-stage companies to get loans from larger, more established banks. SVB made a point of being seen as a friendly lender to innovative companies.
SVB’s impact on healthcare can’t be overstated. The bank had $78.8B in healthcare deposits and investments as of the end of 2022. It had also worked with 76% of healthcare-related initial public offerings (IPOs) since 2020. Its collapse came at a particularly bad time, as U.S. healthcare IPOs and other avenues to access the public markets have slowed significantly. It also came at a tough time for U.S. digital health startups, whose funding landscape in 2022 came in at $15.3B—just over half of 2021’s peak of $29.3B and a five-year low.
Prior to the Federal Deposit Insurance Corporation (FDIC) assuming control of SVB on March 10th, companies of all types were scrambling to determine how much cash, if any, they had tied up at SVB. Dozens of companies proactively communicated how much capital they had at the bank, while others rushed to tell their investors that they had little or no exposure. Thousands of companies relied heavily on SVB for processing their payrolls, making cash liquidity that much more crucial, as many were left scrambling to see if they could pay their employees that week. Luckily, the FDIC stepped in quickly and decisively to ensure that SVB’s depositors had access to all their money.
The FDIC’s actions seem to have forestalled a major run on U.S. banks, but SVB’s downfall has forced companies to be more cautious about who they bank with, diversifying their holdings across different institutions. Thanks to financial mismanagement (not to mention highly flawed crisis communications), hundreds of tech, healthcare and biotech companies are now thinking very carefully about where to park their funds and how to communicate these changes with their investors. These entrepreneurs and startups are wondering where they will go to get the capital they need in a timely way.
Biotech and digital health companies in particular had already been experiencing what even SVB called a downcycle. Experts are concerned that SVB’s collapse could make it more difficult for startups to raise capital, particularly as interest rates continue to rise. Without a nimble, willing banking partner like SVB, the path to needed loans or to a public offering could be slowed significantly for healthcare startups and early stage companies. This could cause a backlog in access to capital—and innovation—that sets the industry back by years, if not a “decade,” according to Garry Tan, president and CEO of startup accelerator Y Combinator.
Experts anticipate that many startups and healthcare companies with funds at SVB will move their capital to larger banks, like JPMorgan Chase, Bank of America, and Citigroup. But SVB was a finance partner that invested a lot of time and capital into understanding the start-up ecosystem, an area where others either weren’t interested, or didn’t have the same financial incentive to do so. Now, as reported by Modern Healthcare, some industry leaders have stressed the need for a bank like SVB that understands the healthcare, startup and entrepreneurial ecosystem so that digital and biotech innovators can get “easy” funding. Though highly unlikely, some are already calling for companies to restore their deposits with SVB now that it is under federal oversight.
The healthcare sector, particularly biotech and digital health, had already been in rough waters. Given Silicon Valley Bank’s broad reach in healthcare and its corresponding huge ripple effect on the market, the future for many innovative firms and startups may be more uncertain today than it was even a week ago. Healthcare companies considering the best path for their next fundraising round or toward a public offering will need to do additional thinking. Others may need to reevaluate their funding runway.
These organizations will also need to carefully consider how to communicate about their business and its funding to potential investors and analysts, who may still be spooked by SVB’s sudden collapse. Having a clear narrative and communications plan (and perhaps, a crisis communications plan—something SVB surely needed) is a critical component of any business—at any time. But these communications plans may be more important than ever for early-stage healthcare companies, who could face a more challenging funding environment now that the go-to bank for public offerings in healthcare has failed.
Let’s hope there’s a company that steps in as the best finance partner for entrepreneurs in healthcare, tech and biotech. Otherwise, we may have to wait a decade for the cutting-edge innovation of tomorrow.
ICR Westwicke has helped hundreds of healthcare companies on the path to an IPO. Especially in this market, experienced guidance is key. Get in touch to learn more.