Silicon Valley banks exploded, and the domestic venture capital circle was implicated

(Source: Oriental IC)

Economic Observation Network reporter Cai Yuekun: The risk impact of the closure of Silicon Valley Bank (SVB) on the other side of the Atlantic is spilling over.

On March 10, local time in the United States, according to a statement released by the Federal Deposit Insurance Corporation (FDIC), the California Department of Financial Protection and Innovation (DFPI) announced the closure of Silicon Valley Bank and appointed FDIC as the receiver. The Silicon Valley Bank incident is the latest financial risk event since the British pension, Credit Suisse scandal and FTX bankruptcy last year.

On March 11, the head of a venture capital fund in Beijing told reporters that due to the involvement of the Silicon Valley Bank incident, individual domestic VC (Venture Capital) institutions still have deposits or other related businesses in Silicon Valley banks and are busy dealing with capital problems.

"It is a loss before it invests, and it is difficult for VC institutions to explain to LP institutions that have contributed capital." The above-mentioned people sighed.

Another partner of a Beijing-based venture capital institution also told reporters that Silicon Valley Bank is a well-known "venture capital institution" in the world, and as an LP, it has also invested in some funds or start-ups in China. The closure of the Silicon Valley Bank in the United States will also affect the subsequent normal fundraising of funds or companies invested in China.

Sudden closure

In the seventies and eighties of the last century, Silicon Valley gradually became a paradise for American entrepreneurs. People here are risk-taking and fearless to fail, and it's where money and talent come together. At the same time, the rising financial demand for technology companies led to the creation of Silicon Valley Bank in 1983.

It is reported that Silicon Valley Bank, as a professional bank serving the venture capital circle in the United States, has been researching and cultivating the emerging technology industry for more than 30 years, and has helped more than 30,000 start-ups to raise funds so far, and has direct business dealings with 600 venture capital institutions and 120 private equity institutions around the world. With a market share of more than 50% in the start-up credit market, it is a well-deserved leading enterprise. In terms of assets, Silicon Valley Bank ranked 43rd among U.S. banks and 23rd with excellent profitability in Forbes' "2018 U.S. Top 100 Banks Ranking".

SVB Financial Group is the holding group of Silicon Valley Bank. The company is the only U.S. banking group serving emerging growth and middle market growth companies, focusing on high-growth industries such as information technology and life sciences, providing personalized financing solutions to companies, individuals and investment institutions in the market.

In addition to Silicon Valley Bank, which operates commercial banking business, Silicon Valley Bank Financial Group's other subsidiaries include SVB Capital Corporation, SVB Asset Management Company, SVB Financial Consulting Company, SVB Analysis Company, SVB Securities Company, SVB Global Financial Company, etc.

As a professional banking institution that is popular in venture capital circles around the world, it suddenly fell like a card.

To protect insured depositors, the Federal Deposit Insurance Corporation created the Deposit Insurance National Bank (DINB), and when a Silicon Valley bank closes, the Federal Deposit Insurance Corporation, as the receiver, is required to immediately transfer all of the Silicon Valley Bank's deposited money to the DINB.

Silicon Valley Bank was shut down on March 10 by the California Financial Protection and Innovation Authority (DFPI), which designated the Federal Deposit Insurance Corporation as the receiver, the FDIC said in the announcement. During the Silicon Valley Bank shutdown, the Federal Deposit Insurance Corporation will transfer all deposited monies to the newly created Santa Clara Deposit Insurance National Bank (DINB). By the morning of the 13th at the latest, all insured depositors will have full access to their deposits.

The maximum amount insured by the FDIC is $250,000 per account. The FDIC said Silicon Valley banks had total assets of about $209 billion and deposits totaling about $175.4 billion at the end of last year, and it was unclear how many of those deposits were above the insurance cap. Depositors with funds exceeding the insurance limit will receive a certificate of takeover of the uninsured balance.

Risk spillover

The impact of the bankruptcy of Silicon Valley Bank also quickly spread to the domestic venture capital circle.

On March 11, a venture capital institution that mainly focuses on early-stage and growth-stage enterprises told reporters that because Silicon Valley Bank mainly cooperates with technology-based start-ups and VC/PE fund business, as an important capital financing bank, the impact of the closure of Silicon Valley Bank has had a huge impact on the capital side of the asset side dominated by technology enterprises and innovative capital, and has caused a certain degree of financial run risk.

"Although SVB mainly serves US clients, since many US dollar funds investing in China also have custodial accounts in Silicon Valley banks, it is bound to spill over the above risks to the local Chinese investment market. It may further dampen the activity of US dollar funds in the Chinese market. The venture capital agency said.

The above-mentioned head of the Beijing-based venture capital fund believes that, first, it may directly affect individual institutions that open accounts in Silicon Valley banks and have deposits; Second, for domestic venture capital institutions, they will also be more cautious when investing in the United States in the short term; Third, in the short term, there may be a low tide period of project investment.

In addition, the above-mentioned Beijing-based venture capital partner also told reporters that the bankruptcy of Silicon Valley Bank may implicate funds or start-ups it has invested in in China. For example, Silicon Valley Bank as an LP to participate in the investment of domestic funds has generally chosen to pay in 3 or 4 installments, and after the closure of Silicon Valley Bank, the funds originally planned to invest later cannot be invested smoothly. This will also affect the next stage of normal investment in the invested fund or start-up.

According to Wind's inquiry, since 2017, as an investor, Silicon Valley Bank has participated in investing in more than 5 financing companies.

Regarding Silicon Valley Bank's provision of capital for PE/VC, according to CICC Capital Research Report, Silicon Valley Bank's two main businesses are to provide capital collection credit for PE/VC and credit loans for start-ups:

First, capital call credit: also known as capital call line of credit or subscription line, is a loan put by Silicon Valley Bank to PE/VC, after the limited partner commits to contribute, PE/VC will not immediately obtain funds, but when it finds investable projects, it will issue a reminder notice to the limited partner, for a variety of reasons such as reducing the solicitation notice, increasing IRR (internal rate of return) and quickly grasping investment opportunities, PE/ VCs typically want to obtain a capital call credit from the bank to help them make a short-term transition and repay the principal and interest once the limited partner funds are available. As a result, these loans are usually short-term, less risky, and often yield lower than traditional commercial loans.

Second, start-up loans: These loans are offered primarily to start-up clients who do not have profitability and cash flow, and who often borrow from Silicon Valley Bank between rounds of equity financing to help them continue their operations. Because of the risk and lack of collateral for such loans, Silicon Valley banks tend to ask startups for 3-5% warrants. Historically, Silicon Valley banks have received much greater returns from warrants than credit losses incurred by such loans, but given the cyclical nature of warrant returns and start-up finances, such loans are still relatively risky, and Silicon Valley banks have been aggressively reducing such loans over the past few years.

For the closure of Silicon Valley Bank to the domestic venture capital circle, the above-mentioned Beijing-based venture capital partner told reporters that Silicon Valley Bank is more keen to invest in TMT, or industry hot spots, but many of these types of projects often end up with fewer projects that can really generate returns, and many are loss-making. However, the current era of follow-up investment in the venture capital circle has passed, and venture capital institutions pay more attention to returning to the essence of business, returning to rationality, and steadily looking at the actual project operation of enterprises.