OVERVIEW

Silicon Valley Bank, a major source of funding behind innovative projects, and a landmark within the technology sector, witnessed a crash last week, leaving a void in the international banking system, which caused significant damage to the financial markets; but how did it happen? 

Usually when  startups received funding through Venture Capital firms, they would deposit their funds in SVB. In the period between 2019 to 2022, SVB saw the value of its deposits grow from $60 billion to $190 billion, as a result of the financial boom in 2021. With all this money in its coffers, SVB invested $91 billion in American bonds (such as MBS) with a yield of 1.5%.

 This did not pose any issue as long as interest rates were held at zero, however, as rates hiked up to 4.5% in 2022, problems began to emerge. The real value of SVB's wallet bonds fell (due to the introduction of bonds with a yield of 4.5%) and at the same time, the amount of deposits into the bank dropped (due to the changing macro context which saw decreasing levels of investment in startups). Consequently, SVB’s value tanked. 

Later, an announcement was made that it would sell part of the bonds and raise capital, to save the situation. As a result, panic broke out amongst depositors and a door race began, with depositors trying to squeeze money out before it was too late. As a result, SVB shares have plummeted, marking a 60% decrease within a few hours. This led to federal interference, whereby congress was summoned for an emergency meeting on Friday March 10 to enforce a solution aimed at preventing a market crash. The FDIC (US authority) and the US government stepped in to protect the deposits of startups and venture capitalists, avoiding a chain failure that would cripple the tech sector and U.S. innovation capacity in the coming years.

MIDDLE EAST

The failure of SVB would surely complicate the process of startup funding. The loss of such a large participant will disrupt investors' and entrepreneurs' trust, calling into question the overall viability of the startup funding paradigm.

Nonetheless, it is important to acknowledge that the failure of one bank does not always imply that the entire sector is problematic. While it may take time for other players to emerge and fill the void left by SVB, the startup community's inventive spirit will continue to push new ideas and procure funding possibilities.

Additionally, the failure of SVB might have far-reaching consequences for the whole Middle Eastern startup sector. Investor trust may be eroded, making it more difficult for entrepreneurs to seek additional funding in the future. This may have a ripple effect throughout the sector, impeding development and innovation, thus making it more difficult for new firms to enter the market. New competitors may not appear right away to fill the void left by SVB, but the startup community's tenacity and drive should not be underestimated.

The demise of SVB raises risks for Middle Eastern businesses, particularly those which rely on investment from US-based venture capital firms. The departure of a large company like SVB might make it more challenging for startups to obtain fresh funding, hampering development and innovation in the region. But nonetheless, the startup community's endurance and perseverance should not be overlooked, and new players will eventually surface to fill the hole left by SVB. While most companies will be unable to take legal action against the bank, it is critical for the industry as a whole to learn from this incident and take actions to safeguard the long-term stability and sustainability of startup funding.