When Silicon Valley Bank collapsed in March, Liz Giorgi, the founder of virtual photo shoot platform Soona, was left wondering how she would make payroll on Monday. Soona had raised $35 million, most of which was tied up at SVB, and other banks were hesitant to offer her a line of credit. Giorgi was forced to ask her board to wire her money to cover payroll for her staff, but the Biden administration’s announcement that all of SVB’s customers would be made whole averted the crisis.
However, the legacy of SVB’s collapse still looms over tech startups that were already being squeezed by an uncertain economy and general skittishness among investors. Giorgi and others are now grappling with how to secure their companies’ financial future. The National Venture Capital Association and PitchBook’s new report reveals that the first quarter of 2023 isn’t looking much brighter, with venture investment continuing to decline and the IPO market largely frozen, leading to declines in both the number and value of late-stage deals.
The collapse of Silicon Valley Bank has had a pointed impact on investors’ psyches, which is likely to have lasting ripple effects on startups seeking capital, according to Kyle Stanford, a senior analyst at PitchBook and an author on a new report. While inflation, rising interest rates, and global instability have all contributed to the crunch, SVB’s undoing has exacerbated the issue, making venture capital firms more diligent about financial risk management when trying to raise money from limited partners.
Tracy Warren, CEO of Astarte Medical, which makes decision support software for hospitals, has had to completely rethink the company’s finances for the next 12 to 18 months due to this shift. Astarte had previously raised $12 million in two rounds, one in 2019 and the other in 2021 when funding for digital health companies was plentiful. However, even before the SVB implosion, Warren was sensing resistance among investors. After SVB’s collapse, the situation worsened, making it difficult for Warren to raise another $8 million this year.
Tracy Warren, CEO of Astarte Medical, says that her company has had to re-evaluate its finances due to the collapse of SVB. She has scaled back non-essential travel, postponed new hires, and deferred senior managers’ compensation. Additionally, Warren has sought near-term funding from her existing network of investors through a convertible note.
While she understands that periods of uncertainty lead to more scrutiny and longer wait times for deals, Warren believes that investors’ hesitancy is more emotionally-based than a substantive hit. Venture funds have also faced pressure beyond SVB, as the last year has seen a decrease in both the number and value of exits, leading to a liquidity crunch among both venture capital funds and their investors.
Alessandro Chesser, a former SVB employee, had plans to raise funds for his company, Dynasty, which runs an online platform for creating a living trust. However, he now plans on bootstrapping the company for the foreseeable future, setting lower revenue targets, and keeping costs at a minimum, due to the market’s sourness and unattractive deal terms.
According to PitchBook, angel and seed rounds accounted for the smallest percentage of all deals in a decade during the first quarter of the year, making it a difficult time for startups looking to raise capital. Zach Holman, co-founder of WorkOn, has been considering repositioning his online marketplace for athletes to capture investors’ attention, possibly by incorporating generative AI.
However, Holman is also considering forgoing outside investment altogether to avoid dilution. Even startups that were not actively fundraising when SVB collapsed have been affected. For example, Soona CEO Liz Giorgi has found it challenging to find a new bank that caters to the unique needs of startups.
SVB had pioneered the venture debt model, which allowed lean startups to use debt to grow their businesses, but other banks have not caught up. Stanford predicts that new entrants to the market may change this, but companies that bank with a partner who understands the quirks of tech startups have had to slow down business as usual. However, Stanford believes that the lessons learned from SVB’s collapse may have ultimately been good for the market.