Tech Funding Takes a Hit
The famous bank for tech startups, Silicon Valley Bank, is creating a bit of chaos, triggering a large selloff in banking shares on Thursday.
Friday has been up and down, and the volatility has overflowed into today’s trading.
It won’t trigger a larger credit event, but shows investors the perils of mismanagement at an institution that was hailed as the lifeblood of small tech firms in California.
My bet is that boutique banks like Silicon Valley Bank (SIBV), exposed to startups that don’t make money, could get dragged into this risk-off move.
The big banks should be just fine, which is why this could present a nice buy-the-dip moment.
Silicon Valley Bank was founded in 1983 and over the decades became the habitual financial institution for startups.
Today, it’s a household name in Bay Area finance, deeply entrenched in tech companies’ networks and infrastructure.
The commotion about the company is more or less about a routine bank run as many cash burn heavy tech investors started to pull funds from SIBV to cover the losses of other tech companies.
The bank was too leveraged with other capital tied up in longer duration bonds and at the worst possible time, they had an insurmountable liquidity requirement which they are having trouble meeting.
Of course, tech investors don’t want to be the last investors withdrawing funds.
The bank is now looking at selling its carcass to bigger hitters that can easily save this bank.
The bank only needs $2 billion in capital to stay solvent, which is a drop in the bucket to the likes of bigger banks like JP Morgan or Bank of America.
SIVB disclosed a $1.8 billion loss showing the treacherous nature of being the famous lender to tech startups in Silicon Valley at a time when this type of business is doing poorly.
Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. So if too many customers tap their deposits at once, it risks a vicious cycle.
A key takeaway from growth tech stocks is to avoid buying and holding for the time being because in the light of possible contagion to the subsector, the weakest of the names get hit the hardest. Any position should be a quick in and out, taking profits before positions sway violently the other way.
This also highlights the ongoing problems in the start-up scene, with tech ideas not getting funded because the debt markets aren’t offering the same type of incentive they used to.
Leverage can be good or bad and in this case, when assets aren’t matched on par with liabilities, these types of credit events or liquidation occurrences happen especially amid the negative backdrop we find ourselves in.
Remember that crypto bank Silvergate (SI) just liquidated after a roaring contagion in the crypto sector.
SI customers pulled their money in the panic that followed the 2022 collapse of the cryptocurrency exchange FTX. Silvergate said in January that it had realized losses of $886 million from selling securities as deposits fell.
This also validates my thesis that we are squarely in a trader's market with volatility working for and against traders and their trades.
The time of buy and hold with a vanilla tech ETF with the traditional tech titans is long gone, and if this isn’t a wake-up call then I don’t know what is.
Right now counting on my expertise as a trader is a must if you plan to survive these hostile and unpredictable markets.
On the bright side, this could offer a timely entry point into some other more solid tech names as I don’t believe this contagion will spread to the heavyweight tech stocks.
