Banking regulators in California closed the Silicon Valley Bank (SVB) Financial Group today after a sudden run strained the bank’s liquidity amidst rising credit risks and weakening deposit growth.
With roughly $200B in assets, SVB is one of the top 50 largest banks in the United States and has been a critical financial partner to many marquee biotech companies for decades. By some estimates, SVB provided financial services to half of all venture-backed tech and life sciences startups last year.
The U.S. hasn’t seen a bank failure of this magnitude since the financial crisis in 2008. Given its reach and importance as a financial institution to the biotech world, SVB’s financial woes will be felt across the life sciences industry for a long time.
Breaking Down the SVB Bank Collapse Impacts to Biotech Companies and the Life Sciences Industry
While it is too early to tell, there could be significant broader market implications that must be monitored by life sciences executives.
Some of these impacts may include:
- Dry powder could be harder to come by. Lenders could become more cautious in coming weeks until markets settle down and next steps are defined about the future of SVB assets and their liquidity. Lending activity across the biotech sector could be negatively impacted, despite the availability of funds from other lending institutions – after all, the risk profiles and tolerances for Silicon Valley Bank is very different than those of more mainstream financial institutions. In the short term, avoiding disruptions to lines of credit for working capital should be a key priority for biotech CFOs right now. In more dire scenarios, we may see companies in upcoming weeks being unable to make payroll. Biotech executives will have the difficult challenge of balancing immediate needs with the opportunity presented to outside investors looking to buy into distressed assets at steep discounts.
- Prospects for investments for early-stage companies could be further clouded. As interest rates continue to rise, and with SVB’s downfall as a compounding factor, there could be further pessimism for investors’ willingness to fund early biotech startups. Not only might it be harder to find funding, but rates could be more expensive and less flexible as well. The outlook for raising capital and further investments in early-stage life sciences organization may become even more uncertain in coming months.
- Systemic risk is still at play. There are many unknowns for what the ripple effect of SVB’s challenges will mean for the entire market, but the default could pose systemic risks to the broader financial markets, which in turn could impact organizations that might not necessarily be connected to SVB (i.e., companies with no financial ties to SVB). SVB’s collapse may cause waves of panic among public market investors, and biotech valuations are already seeing an impact today and may be impacted in the short- to mid-run as well. This could have transformational impacts for the biotech industry as investors become more risk averse and scrutinize investments more so than ever before.
- Capital expenditure might be impacted in the short run. Investors and executives across the biotech industry may become more tentative on their capital investments in the weeks and months to come. This could translate into an even greater willingness to explore or continue to leverage virtual organizations (the practice of partnering with a variety of vendors such as CRO, CMO, CDMO, etc.) to create operational flexibility.
- Further regulatory scrutiny will likely take place. While this may take time to unfold, we can likely expect government regulators to step up to the plate and conduct post-mortems on SVB to ensure regulatory mechanisms are in place to avoid future issues. In the long run, this could mean delays and/or slowdowns in the ability to secure funding from lending institutions for biotechs.
- M&A activity may increase. With every crisis comes an opportunity: large pharmaceutical companies with strong cash and balance sheet positions might find opportunities to expand their therapeutic portfolios. Business development teams across pharma companies should be actively scouring for cash-strapped biotechs with ties to SVB who might present interesting targets.
Looking Ahead: The Criticality of Financial Stability and Risk Management
The full impact of SVB’s closure will take time to fully materialize across the biotech and life sciences industry as well as the broader financial market. With many marquee biotechs relying on SVB for financing and liquidity, the potential implications of the bank’s downfall are significant. At this early stage in the process, there is still hope that another institution could come into the picture this weekend and purchase the uninsured deposits, which would bring broader stability to the market. However, as each hour passes without a hero emerging for SVB and their customers, the outlook for the early-stage biotech market gets murkier.
SVB will serve as a reminder for biotech executives about the criticality of financial stability and risk management for all organizations, particularly those closely dependent on funding. To chat more on the Silicon Valley Bank collapse and its impact to the industry, connect with one of our biotech experts today.