Within just 48 hours, the bank that several new biotechnology companies had relied on for ages was gone.
On March 10, the Federal Deposit Insurance Corp. closed Silicon Valley Bank, leading to a dramatic collapse that shook the financial sector. SVB was an important partner for biotech’s, keeping money for growing businesses and their venture investors and assisting with the initial public offerings (IPOs) on which they counted as they matured. It is now in federal receivership, and regulators are holding an auction for offers from other banks to purchase it.
The U.S. government took special precautions on March 12 to ease fears of a wider spread crisis, declaring that it would protect the bank’s depositors as well as those of another institution, Signature Bank, which closed on that day. Both banks’ depositors will have access to their funds.
Even so, SVB’s bankruptcy adds further uncertainty to an industry that has seen the most upheaval in years. Prior to the federal government’s intervention on March 12, the main concern was that enterprises with funds frozen in SVB accounts would be unable to pay their employees or cover other short-term expenses. According to BioPharma Dive, several venture capitalists were considering lending money to their portfolio businesses to meet expenditures.
Scores of biotechs, including some that do not do business with SVB, published hasty statements on March 10 and over the weekend. A few scheduled and then after the disclosure on March 12, cancelled the conference calls with investors.
The founder and CEO of startup Infinimmune, Wyatt McDonnell, remembered having to send an email to their main investors on March 9 saying not to worry about them as they remain unaffected by SVB’s shutdown.
Investors and executives questioned by BioPharma Dive over the weekend expressed confidence that, as long as SVB’s failure does not spread, the bank’s fall will cause just short-term headaches rather than long-term concerns.
The Fed’s intervention is crucial for depositors there and worldwide, according to Atlas Venture partner Jason Rhodes. As far as they know, SVB experienced a liquidity crunch due to a duration mismatch, yet they were solvent. And the Fed learned a lot about how to handle these circumstances throughout the 2008 financial crisis.
Michael Gilman, founder of startup Arrakis Therapeutics, stated that he has a high level of trust in the institutions that handle their money today, but they’ve all been taught a harsh lesson about the importance of diversification.
A Weekend Flood
SVB is intimately linked to the biotech startup scene, a position it acquired by working with risky, immature companies that traditional banks might be unwilling to work with.
According to the SVB website, the bank has worked with more than half of the healthcare firms that have raised a venture round since 2021, as well as three-quarters of those that have gone public. SVB had $173 billion in deposits before it was closed, with more than 12% coming from the life sciences or healthcare industries. Polaris Partners, as well as Bain Capital, were one of its clients.
The firm’s downfall, caused by a bank run as firms rushed to withdraw their deposits, put much of that money in jeopardy. While the FDIC protects deposits up to $250,000, more than 90% of SVB’s total deposits were not secured as of the end of last year, according to a regulatory filing. This temporarily fueled concerns that uninsured funds would be inaccessible or perhaps irrecoverable.
Genetic medicine developer Sangamo Therapeutics, for example, informed investors on March 10 that it had over $34 million placed in SVB and didn’t know if it would be able to recover those monies.
The implications might be significant for some. Businesses with large deposits in SVB were concerned about their ability to pay their employees. That’s what has most people worried this week, according to Gilman on March 12.
The biggest consequence will be access to funds for payroll, ongoing operations, and research, said Jeff Jonas, former CEO of Sage Therapeutics and founder of Abio-X. If they can’t obtain access to the cash that was placed with SVB, it may be an unpleasant situation for a lot of organizations.
The FDIC transferred all certified as well as uninsured deposits to a new bridge bank over the weekend and stated in a March 13 statement that all customers would have full access to their money and checks would clear. Shareholders and certain debt holders will not be protected, according to the FDIC.
According to McDonnell, prior to the government’s move, most major venture capitalists were directing their portfolio firms to large banks like J.P. Morgan and Citibank or minor startup and founder-friendly banks like Mercury and First Republic Bank.
He is delighted that it doesn’t relate to them, but he is sure there are many founders looking to figure it out from the ground up. McDonnell posted a LinkedIn message offering advice or connections to fellow founders.
According to sources, certain companies may receive loans from their investors to assist them in maintaining operations. For example, Rhodes stated that Atlas was prepared to provide short-term liquidity to portfolio companies if it was required today.
Even businesses that were not directly related to SVB felt the heat. Dozens of publicly traded biotech companies released news outlining their exposure to SVB during the last three days, while Wall Street analysts issued a flood of notes attempting to evaluate the impact on the businesses they cover.
Gilman stated that, while Arrakis is unharmed, he and other officials spent much of March 10 speaking with the board, workers, and partners regarding the status of their banking ties and the safety of their cash.
Many of Arrakis’ SVB-banked vendors were also sending new account information that the company needed to validate, adding to the logistical issues.
Gilman also mentioned that because it is bonus season, employers’ payroll responsibilities are currently higher than usual. Meanwhile, businesses that attempted to transmit funds over the weekend may not have known where their funds were.
Going Forward
The government’s promise to guarantee all SVB deposits reduces the likelihood of immediate ramifications from the bank’s liquidation. The measure, which was accompanied by an offer of additional liquidity to other depository institutions, is intended to protect the US banking system and avoid runs on other banks.
President Biden stated that the American people and businesses may have faith that their bank savings will be there when they need them.
Individuals who talked with BioPharma Dive saw SVB’s fall as a one-time occurrence caused by blunders in its strategy and communication rather than a foreshadowing of larger issues. Jonas expressed the hope that people would take their time to analyze why this happened, whether new laws or regulations are necessary, or whether the unsatisfactory management practices of a certain group were the cause rather than a widespread trend.
Industry veterans were also convinced that SVB’s fall would not be a worry for the biotech sector’s liquidity crunch, which is at its worst in years. Jonas remarked that investors had become significantly more cautious in the last year.
Rhodes stated that without SVB, there is sufficient banking capacity. Numerous banks have contacted the firm and offered assistance to its portfolio companies.
There is great commercial banking capacity in the United States, and the whole banking community moved up over the weekend to assist companies in opening new accounts, etc., so they could continue operating this week, he stated.
