How dangerous is SVB’s bankruptcy for Europe’s startups?

It’s the biggest bank failure in the U.S. since the 2008 financial crisis, and the collapse of Silicon Valley Bank (SVB) could yet prove to be a major blow to Europe’s startup ecosystem.

A concatenation of crises in Europe and around the world has been severely impacting our economy for a good three years. The startup or venture capital market is not immune to geopolitical and general economic developments. Historically, however, crises have also had their positive sides. They have often been drivers of innovation. That explains the high investment records and the relatively stable market sentiment (see also: European Venture Sentiment Index). What happens now when the heart of the innovation industry, Silicon Valley Bank (SVB), the most active startup investment bank in the world, suddenly finds itself in trouble due to the rising interest rate environment and poor management? Is this bank critical to the system? Does this bank failure also affect Austrian founders and investors? Was the SVB an isolated case?

SVB’s importance to the innovation sector

SVB was indeed, as FED, FDIC and HM Treasury have stated, in any case not system-critical for the banking sector, but very much so for the innovation sector. Hundreds of thousands of jobs in the technology sector and deposits from over 1,000 venture funds were suddenly at stake. Banks in general seem to be particularly risky at the moment. This week, for example, the rating agency Moody’s changed the short-term rating of the entire U.S. banking sector from “stable” to “negative. Credit Suisse’s credit default swaps – a key indicator of default risk – shot up. In light of this news, we feel very much reminded of 2008. The banking sector is once again in enormous trouble due to high savings volumes, low lending, coupled with the geopolitical crisis, a generally crisis-ridden economy and increased interest rates.

Parallels to 2008?

However, compared to the Lehman Brothers bank failure in 2008, one has to see very clear differences here. Although SVB ranked 16th among all U.S. banks in terms of total assets, it was far smaller than Lehman Brothers. A venture capitalist specializing in the technology industry may be systemically relevant for its niche. But it is of rather minor importance for the global financial system. SVB’s bankruptcy did not cause a global, cross-industry domino effect, as we saw in 2008. It is more likely to be the central banks that are causing the sector to suffer globally.

Experts considered the Silicon Valley Bank as one of the most important financiers for the start-up scene in the USA. But German and Austrian startups are also said to be affected by the insolvency. Worldwide, there is talk of a total of several tens of thousands of affected corporate customers. SVB’s bankruptcy could yet prove to be a major blow to Europe’s startup ecosystem, as it is not clear what HSBC (the new owner of SVB U.K.) will do with the bank. The U.S. bank was very strong and important in our niche, which no one else could or wanted to fill. European banks are risk averse and much more hesitant when it comes to lending to startups, specifically technology companies. They much preferred to finance large real estate developers, but this could be their undoing. The first rumors that Raiffeisen Bank International, which apparently gave credit lines worth billions to Signa Holding, among others, is not doing very well are already making the rounds in Vienna’s financial center.

Impact on European startups and financing bottlenecks

Historically, the innovation sector has generally been more crisis-resistant than liquid stock markets – although not immune to corrections – and has even been spurred on in part by a wave of start-ups based on many releases of talent. What was always needed, however, was venture capital. In this area, the company has recently already had to contend with financing bottlenecks. The loss of SVB has further exacerbated this situation. We now fear that this collapse will discourage other banks even more than before from financing technology companies in the same way.

In the case of our portfolio companies, we have always paid attention to good risk management. Accordingly, SVB’s bankruptcy affected neither them nor our funds. In our crypto fund “Tigris Web3”, we are paying close attention to how the eruptions in the traditional financial sector will play out. Tendentially, our analysts see a great opportunity for decentralized financial providers, provided the stablecoin problem is solved. So-called CBDC (Central Bank Digital Currency) can quickly trigger an upswing in the crypto market. There may be an opportunity in this market even if the traditional financial world wobbles.

This article written by Venionaire Capital’s CEO Berthold Baurek-Karlic was originally published as a guest commentary in the Wiener Zeitung. 

How wealthy families seek returns

The degree to which family offices are willing to take risks is also influenced by the age of their investments. Family portfolios have recently undergone some changes.

In the previous year, investors had to be skillful to achieve positive returns. Apart from a few outliers like the Brazilian Bovespa, stock indices and government bonds ended the year on a downward trend. With the recent rise in interest rates, the previous upward trend in real estate prices has stalled in several locations. These developments have caused significant changes in the portfolios of family offices, which tend to maintain a low profile.

Liquidating real estate

While family offices’ investment approaches are typically kept confidential, recent investment trends have been observed, according to our Managing Partner (CEO) Berthold Baurek-Karlic, who spoke to the Austrian Newspaper “Die Presse“. “I have witnessed the most rapid divestment from real estate in my entire career. The scale and swiftness of the reduction were astounding”, said our CEO.

Family Offices

Over the past few months, Europe’s family offices have been re-allocating their portfolios in a manner that would be unsuitable for investors seeking rapid returns. “The investors we collaborate with are highly resilient”, notes family office specialist Frank Floessel in an interview with “Die Presse”. “The same goes for investments in venture capital or private equity. These asset classes have lower liquidity and exiting them in the short term often incurs significant discounts.”

Investors with Long-term Perspective

Family offices, however, frequently possess the luxury and fortitude to maintain investments for decades. This is why they are instrumental in supporting investors in nascent businesses, where it is uncertain when and how much profits will be earned. Industries reliant on research, in particular, demand long-term commitment.

Our CEO Baurek-Karlic explains: “We are overseeing a space company that would not have been possible without the support of the public sector and family offices. They may have considerable resources, but at the end of the day, the technological undertaking must be feasible, financially viable, and sustainable.”

Baurek-Karlic and Floessel refrain from mentioning the entrepreneurial families that they advise on asset management. However, the experts stress that various offices have diverse investment strategies. While some prioritize philanthropy, others distance themselves from charitable contributions and patronage.

Legacy Wealth

“There are families that wholeheartedly embrace venture investments, while others adopt a highly conservative investment approach. My differentiating factor there is primarily the age of the wealth,” explains Floessel. “The older the wealth, the greater the probability of a more distant relationship with it.”

You can find the full article (published in German) here.