Silicon Valley Bank—The bank is dead, long live the bank

Implications for Life Science Venture Capital, Innovation, and Global Economies

Common issues for life science businesses during economic crises...

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Reduced Consumer Spending

Economic downturns make people cautious with money. Businesses see fewer sales as customers cut back. This hits revenue hard.

Cash Flow Woes

Tight credit markets and low sales create cash flow problems. Collecting money becomes tough, and financing is a challenge. 

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Cash Flow Woes

Tight credit markets and low sales create cash flow problems. Collecting money becomes tough, and financing is a challenge. 

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Supply Chain Hiccups

Economic crises mess up global supply chains. Less demand, transportation issues, and production disruptions make it hard to get raw materials. 

Market Swings

Economic crises bring uncertainty and market flux. Currency values, interest rates, and commodity prices ebb, making planning tough. 

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Market Swings

Economic crises bring uncertainty and market flux. Currency values, interest rates, and commodity prices ebb, making planning tough. 

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The collapse of Silicon Valley Bank has raised many concerns throughout the US as well as the rest of the world. Shareholders, investors, and VC companies are watching for further signs of US Government help, including the possibility of a last-minute bailout or acquisition that may not be coming.    

The initial cause for the failure came on Friday, March 9, 2023, when Silicon Valley Bank, or SVB, announced that it would be fundraising $2.25 billion in public offerings to cover its treasury. The bank did not learn valuable lessons from former Prime Minister Liz Truss, and in true ‘Trussian’ fashion, SVB's poor rollout of communication concerning these fundraising purposes caused mass panic. This led many bank customers to withdraw their money. As they did, the amount of cash SVB had on hand for the withdrawals could not cover the total withdrawal sum, and the bank sold its securities at low cash prices all while its stock crashed.     

In response to the bank's failure, US officials announced they would cover all cash owed to SVB customers. This includes the money that was not insured by FDIC, and it will be paid for from the fees that banks pay into the Deposit Insurance Fund. This action, newly dubbed the Bank Term Funding Program, has worked so far, curbing excessive panic and stopping the market from tanking further. On March 13, President Biden reassured the public that the banking system is safe and that funds will ‘be there when you need them.’ 

Biden also promised that the leadership teams of SVB, as well as Signature Bank (a bank which faced similar failures to SVB), would be fired. Both banks were overtaken by FDIC on Friday. The investors of each bank will have to suffer losses. 

‘That’s how capitalism works,’ says Biden. The US Government is still investigating the full story before any further actions will be taken.

The UK had a slightly different experience when HSBC swiftly acquired the British arm of SVB, putting a muzzle on certain risks for the UK markets. Though HSBC has acquired the UK arm, hits to the US market have historically affected the UK. This happened after the 2008 crash, which sent the UK to its lowest economic recession since the Second World War. Because of this history, we can not be sure that the UK is safe from whatever ripples are to come. The question is how these US failures will affect the UK this time, especially during an already troublesome recession. 

These events beg many other questions as well. Specifically, what will yet another US bank failure mean? 

The implications are frightening, especially for those who still have the 2008 economic crisis fresh on their mind. Though in many ways, the March 2023 bank failure is different from 2008, and perhaps, more significant for the government to save. The primary reason I say this is that SVB holds roughly 50% of the US biotech market and funds; a market that is built to save lives. These biotechs are then at a higher risk of having their IPs and patents for innovation eaten up by big pharma for pennies on the pound; an innovation that could save millions of lives. 

So what does this failure mean for the biotech community as a whole? First of all, US biotech—the leading biotech innovators in the world—will take an inevitable hit, meaning that some innovations will suffer prolonged trials and funding complications simply because the innovation cluster that was Silicon Valley Bank has failed. Another implication is money’s ‘multiplying factor’—the phenomenon of money creating more value while circulating in the economy—could be damaged. Biotech projects could be delayed up to five years, triggering an insolvency cycle and adding more obstacles to innovation.

If SVB does go belly up in the end—meaning it does not get the government bailout—we can take solace that the bank was only holding $225b—a small amount compared to the larger economy. Yet, a substantial amount for innovative, smaller biotechs. It would also pose a greater question. Why are certain ‘too big to fail’ companies, such as Wells Fargo and General Motors, bailed out while banks like Silicon Valley Bank—a bank which heavily supports biotech innovation—are left to the wolves? 

Yet, all questions will be answered when it’s clear how the US Government plans to fully respond to the SVB failure in the long term. Right now, it looks as if the US Government is at least considering letting SVB rot, leaving the US Treasury to foot the bill. If this is the case, it could lead to further USD printing causing more inflation on top of the record highs we’ve seen since 2021; record highs that not many can afford more of. 

So I say this—we must not allow Silicon Valley Bank to fail. Not as taxpayers, as shareholders, or as company owners. 

If ever ‘too big to fail’ were true, it is right here. 

HSBCs acquisition of SVB’s UK arm is a business transaction unlike anything I’ve seen, and this swift action has already curbed further economic downturn. I believe that we should support SVB and its customers until the end and that support should continue to come from elected leaders. 

I believe the US government will without a doubt bailout or acquire SVB just as HSBC did in the UK (my hat goes off to Prime Minister Sunak for this swift action, I hope UK Government intervention continues on this issue), and from that point, the US will take control. Government intervention will save the innovative biotech market from years of setbacks. If they do this, I predict that the issue will be solved in three months' time; three valuable months of enabling services to curb further economic downturn. I say this because I believe there is no other choice but to step in for not only financial reasons but for societal health overall.  

I may be wrong. And if I am your next drink is on me. But if I’m right — which I truly hope and believe that I am — I would like us to please remember that ‘too big to fail’ sometimes means more than simply 'money.' Sometimes, it means our greater good; sometimes it means ‘too important to fail.’ 

 

Written by Aamir Butt, CEO of Mazards, one of the top life science job recruitment agencies in the UK.

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