SVB collapse is double-whammy for tech startups already navigating brutal market
For ChartHop’s prior round in 2021, it took White less than a month to raise $35 million. The market turned against him in a hurry.
“There was just a complete reversal of the speed at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments.
Whatever comfort White was feeling in January quickly evaporated last week. On March 16 — a Thursday — ChartHop held its annual revenue kickoff at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White was speaking in front of more than 80 employees, his phone was blowing up with messages.
White stepped off stage to find hundreds of panicked messages from other founders about Silicon Valley Bank, whose stock was down more than 60% after the firm said it was trying to raise billions of dollars in cash to make up for deteriorating deposits and ill-timed investments in mortgage-backed securities.
Startup executives were scrambling to figure out what to do with their money, which was locked up at the 40-year-old firm long known as a linchpin of the tech industry.
“My first thought, I was like, ‘this is not like FTX or something,’” White said of the cryptocurrency exchange that imploded late last year. “SVB is a very well-managed bank.”
But a bank run was on, and by Friday SVB had been seized by regulators in the second-biggest bank failure in U.S. history. ChartHop banks with JPMorgan Chase, so the company didn’t have direct exposure to the collapse. But White said many of his startup’s customers held their deposits at SVB and were now uncertain if they’d be able to pay their bills.
While the deposits were ultimately backstopped last weekend and SVB’s government-appointed CEO tried to reassure clients that the bank was open for business, the future of Silicon Valley Bank is very much uncertain, further hampering an already troubled startup funding environment.
SVB was the leader in so-called venture debt, providing loans to risky early-stage companies in software, drug development and other areas like robotics and climate-tech. Now it’s widely expected that such capital will be less available and more expensive.
White said SVB has shaken the confidence of an industry already grappling with rising interest rates and stubbornly high inflation.
Exit activity for venture-backed startups in the fourth quarter plunged more than 90% from a year earlier to $5.2 billion, the lowest quarterly total in more than a decade, according to data from the PitchBook-NVCA Venture Monitor. The number of deals declined for a fourth consecutive quarter.
In February, funding was down 63% from $48.8 billion a year earlier, according to a Crunchbase funding report. Late-stage funding fell by 73% year-over-year, and early-stage funding was down 52% over that stretch.
‘World was falling apart’
CNBC spoke with more than a dozen founders and venture capitalists, before and after the SVB meltdown, about how they’re navigating the precarious environment.
David Friend, a tech industry veteran and CEO of cloud data storage startup Wasabi Technologies, hit the fundraising market last spring in an attempt to find fresh cash as public market multiples for cloud software were plummeting.
Wasabi had raised its prior round a year earlier, when the market was humming, IPOs and special purpose acquisition companies (SPACs) were booming and investors were drunk on low interest rates, economic stimulus and rocketing revenue growth.
By last May, Friend said, several of his investors had backed out, forcing him to restart the process. Raising money was “very distracting” and took up more than two-thirds of his time over nearly seven months and 100 investor presentations.
“The world was falling apart as we were putting the deal together,” said Friend, who co-founded the Boston-based startup in 2015 and previously started numerous other ventures including data backup vendor Carbonite. “Everybody was scared at the time. Investors were just pulling in their horns, the SPAC market had fallen apart, valuations for tech companies were collapsing.”
Friend said the market always bounces back, but he thinks a lot of startups don’t have the experience or the capital to weather the current storm.
“If I didn’t have a good management team in place to run the company day to day, things would have fallen apart,” Friend said, in an interview before SVB’s collapse. “I think we squeaked through, but if I had to go back to the market right now and raise more money, I think it’d be extremely difficult.”
In January, Tom Loverro, an investor with Institutional Venture Partners, shared a thread on Twitter predicting a “mass extinction event” for early and mid-stage companies. He said it will make the 2008 financial crisis “look quaint.”
Loverro was hearkening back to the period when the market turned, starting in late 2021. The Nasdaq hit its all-time high in November of that year. As inflation started to jump and the Federal Reserve signaled interest rate hikes were on the way, many VCs told their portfolio companies to raise as much cash as they’d need to last 18 to 24 months, because a massive pullback was coming.
In a tweet that was widely shared across the tech world, Loverro wrote that a “flood” of startups will try to raise capital in 2023 and 2024, but that some will not get funded.
Federal Reserve Chair Jerome Powell arrives for testimony before the Senate Banking Committee March 7, 2023 in Washington, DC.
Win Mcnamee | Getty Images News | Getty Images
Next month will mark 18 months since the Nasdaq peak, and there are few signs that investors are ready to hop back into risk. There hasn’t been a notable venture-backed tech IPO since late 2021, and none appear to be on the horizon. Meanwhile, late-stage venture-backed companies like Stripe, Klarna and Instacart have been dramatically reducing their valuations.
In the absence of venture funding, money-losing startups have had to cut their burn rates in order to extend their cash runway. Since the beginning of 2022, roughly 1,500 tech companies have laid off a total of close to 300,000 people, according to the website Layoffs.fyi.
Kruze Consulting provides accounting and other back-end services to hundreds of tech startups. According to the firm’s consolidated client data, which it shared with CNBC, the average startup had 28 months of runway in January 2022. That fell to 23 months in January of this year, which is still historically high. At the beginning of 2019, it sat at under 20 months.
Madison Hawkinson, an investor at Costanoa Ventures, said more companies than normal will go under this year.
“It’s definitely going to be a very heavy, very variable year in terms of just viability of some early-stage startups,” she told CNBC.
Hawkinson specializes in data science and machine learning. It’s one of the few hot spots in startup land, due largely to the hype around OpenAI’s chatbot called ChatGPT, which went viral late last year. Still, being in the right place at the right time is no longer enough for an aspiring entrepreneur.
Founders should anticipate “significant and heavy diligence” from venture capitalists this year instead of “quick decisions and fast movement,” Hawkinson said.
The enthusiasm and hard work remains, she said. Hawkinson hosted a demo event with 40 founders for artificial intelligence companies in New York earlier this month. She said she was “shocked” by their polished presentations and positive energy amid the industrywide darkness.
“The majority of them ended up staying till 11 p.m.,” she said. “The event was supposed to end at 8.”
Founders ‘can’t fall asleep at night’
But in many areas of the startup economy, company leaders are feeling the pressure.
Matt Blumberg, CEO of Bolster, said founders are optimistic by nature. He created Bolster at the height of the pandemic in 2020 to help startups hire executives, board members and advisers, and now works with thousands of companies while also doing venture investing.
Even before the SVB failure, he’d seen how difficult the market had become for startups after consecutive record-shattering years for financing and an extended stretch of VC-subsidized growth.
“I coach and mentor a lot of founders, and that’s the group that’s like, they can’t fall asleep at night,” Blumberg said in an interview. “They’re putting weight on, they’re not going to the gym because they’re stressed out or working all the time.”
VCs are telling their portfolio companies to get used to it.
Bill Gurley, the longtime Benchmark partner who backed Uber, Zillow and Stitch Fix, told Bloomberg’s Emily Chang last week that the frothy pre-2022 market isn’t coming back.
“In this environment, my advice is pretty simple, which is — that thing we lived through the last three or four years, that was fantasy,” Gurley said. “Assume this is normal.”
Laurel Taylor recently got a crash course in the new normal. Her startup, Candidly, announced a $20.5 million financing round earlier this month, just days before SVB became front-page news. Candidly’s technology helps consumers deal with education-related expenses like student debt.
Taylor said the fundraising process took her around six months and included many conversations with investors about unit economics, business fundamentals, discipline and a path to profitability.
As a female founder, Taylor said she’s always had to deal with more scrutiny than her male counterparts, who for years got to enjoy the growth-at-all-costs mantra of Silicon Valley. More people in her network are now seeing what she’s experienced in the almost seven years since she started Candidly.
“A friend of mine, who is male, by the way, laughed and said, ‘Oh, no, everybody’s getting treated like a female founder,’” she said.
WATCH: Cash crunch could lead to more M&A and quicker tech IPOs
‘Inundated with requests’: Digital currency firms look to Swiss banks after crypto-friendly lenders fail
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Some of these companies have turned to crypto-friendly Swiss banks, flooding them with requests for banking services, according to multiple industry insiders who spoke to CNBC.
Typically, the crypto industry has found it difficult to access banking services from traditional lenders, who don’t want to touch anything that does not have a clear regulatory framework. This has included blockchain and crypto firms, who have instead had to turn to specialist banks.
But with two of the biggest lenders, along with SVB, now out of the picture, cryptocurrency firms have turned to Switzerland, which has sought to market itself as a crypto hub with solid regulation.
“We have been inundated with requests,” said an advisor at a private Swiss bank, who preferred to remain anonymous due to the sensitive nature of the matter.
The advisor said on the Monday after Silvergate and Signature Bank’s winddown this month, the private lender had more requests in a single day than ever before.
“It is just nuts,” the advisor said.
U.S., non-Europe firms look to Switzerland
Dominic Castley, chief marketing officer at Sygnum, one of Switzerland’s biggest banks that is focused on servicing digital asset companies, said it is seeing an influx of enquiries.
“Over the past weeks as the current banking industry events have unfolded, we have seen a significant increase in onboarding enquiries from various international locations,” Castley said, adding that Sygnum’s location in both Switzerland and Singapore is attractive to companies.
Sygnum has a Swiss banking license and a capital markets services license in Singapore, bringing it under the purview of regulators.
One Switzerland-based advisor to financial technology companies, who also preferred to remain anonymous due to the sensitivity of the situation, said that has been “a lot more inflow from U.S. customers” to Swiss banks.
An executive at a European trading firm, meanwhile, said their company had been seeing “non-Europe based entities” making enquiries for new banking relationships. The executive, who wished to remain anonymous due to the sensitive nature of the topic, said these firms include crypto-focused hedge funds and venture capital firms.
Castley said interest is “mainly coming from investors, asset managers and blockchain projects looking to diversify their crypto investments with a trusted Swiss partner like Sygnum Bank.”
Switzerland’s other major lender that deals with the digital assets industry — SEBA Bank — did not respond to a request for comment when contacted by CNBC.
Switzerland’s crypto-friendly stance
Part of why companies are seeking out Swiss banks is the country’s regulation which is welcoming to cryptocurrency firms in need of a stable operating environment.
The country has created what locals dub “Crypto Valley” in the region of Zug, just outside the Swiss capital Zurich, where start-ups and more established digital currency firms have set up shop.
In 2021, the government introduced a regulation on companies using so-called “distributed electronic register technology” or blockchain, which originated with the cryptocurrency bitcoin but has since evolved.
Thierry Arys Ruiz, CEO of Swiss-based blockchain firm AgAu.io, said Switzerland is “more stable” and there is “more certainty to what the rules are.”
The anonymous advisor at the private Swiss bank said that companies are coming to Switzerland to be in a “safer jurisdiction” for crypto regulation.
TikTok CEO appeals to U.S. users ahead of House testimony
Filming from Washington, D.C., Chew emphasized the large scale of TikTok users, small and medium-sized businesses and its own employees based in the U.S. that rely on the company. The message may preview his appeal to lawmakers Thursday, where he will be faced with questions about the ability of its Chinese parent company ByteDance, and the Chinese government, to access U.S. user information collected by the app.
TikTok says it has worked to create a risk mitigation plan to ensure that U.S. data doesn’t get into the hands of a foreign adversary through its app. The company has said U.S. user data is already stored outside of China.
But many lawmakers and intelligence officials seem to remain unconvinced that the information can be safe while TikTok is owned by a Chinese company. TikTok said last week that the Committee on Foreign Investment in the U.S., which is reviewing risks related to the app, is pushing for ByteDance to sell its stake or face a ban.
Chew disclosed in the video that TikTok has more than 150 million monthly active users, or MAUs, in the U.S., representing massive growth from August 2020, when it said for the first time that it has about 100 million MAUs in the country. That number includes 5 million businesses that use the app to reach their customers, with most of those being small or medium-sized businesses. He also said TikTok has 7,000 U.S.-based employees.
“This comes at a pivotal moment for us,” Chew said, referencing lawmakers’ threats of a TikTok ban. “This could take TikTok away from all 150 million of you.”
Chew then appealed to users directly to share in the comments what they want their representatives to know about why they love TikTok.
Bill Gates says OpenAI’s GPT is the most important advance in technology since 1980
Mandel Ngan | AFP | Getty Images
Before that, people used their computers through a command line. Gates took the “GUI” technology and based Windows around it, creating a modern-day software juggernaut.
Now, Gates sees parallels with OpenAI’s GPT models, which can write text that resembles human output and generate nearly usable computer code.
He wrote in a blog post on Tuesday that he challenged the OpenAI team last year to develop an artificial intelligence model that could pass the Advanced Placement Biology exam. GPT-4, released to the public last week, scored the maximum score, according to OpenAI.
“The whole experience was stunning,” Gates wrote. “I knew I had just seen the most important advance in technology since the graphical user interface.”
“The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it,” he continued.
Gates is the latest big name technologist to take a position on recent advancements in AI as a major shift in the technology industry. He joins former Google CEO Eric Schmidt and former Amazon CEO Jeff Bezos who have predicted that data-based machine learning could change entire industries.
Current CEOs also see major business opportunities in AI applications and tools. Nvidia CEO Jensen Huang said on Tuesday that the field is experiencing an “iPhone moment,” referring to the time when a new technology becomes widely adopted and entrepreneurs see opportunities for new businesses and products.
Gates and Microsoft have close ties to OpenAI, which developed the GPT model. Microsoft invested $10 billion in the startup and sells some of its AI software through Azure cloud services.
Gates suggests that people talking about AI should “balance fears” of biased, wrong or unfriendly tools with its potential to improve lives. He also believes governments and philanthropies should back AI tools to improve education and health in the developing world, because companies won’t necessarily choose to make those investments themselves.
The entire post from Gates is worth a read over at his blog.
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