In March of this year, America’s Silicon Valley Bank was hit by a bank run, leading to the second largest bank failure in US history and a catastrophic downfall which reverberated across the world’s financial markets. Its failure had prompted fears of wider meltdown, with share prices plummeting and US agencies scrambling to contain the fallout and prevent runs on other lenders. After a tense wait, regulators eventually stepped in to protect depositors, averting the most dramatic potential consequences and effectively containing the situation.
As the news of the collapse of Silicon Valley Bank spread throughout the tech industry, many European startups were left wondering what this would mean for their businesses. SVB had long been a key player in the startup ecosystem, providing financing and other support services to tech companies across the globe. However, although its demise has undoubtedly been a blow to the industry, the reality is that the impact on European startups may not be as dire as was initially feared.
Shaking Off Silicon Valley’s Shadow
When trying to make sense of what exactly transpired with SVB’s unexpected collapse, it’s important to note that it was not due to any fundamental issues with the tech industry or the startups it supported. Rather, the bank had been struggling with internal management issues and had – many experts note – been guilty of poor decision making, such as selling US treasury bonds at a loss. It’s therefore clear that the collapse itself is not a reflection of the health of the tech industry, or the potential for European startups to thrive over the coming years.
Secondly, while SVB was certainly a major player in the tech financing space, it was by no means the only one in town. There are a number of other banks who provide financing and support services to startups in Europe, such as Deutsche Handelsbank, European Investment Bank, and NIBC. And besides, within Europe in particular, investment and debt financing from SVB was far from one of the most common sources of funding for startups, with most opting to rely on angel investors and VC firms through seed and series A. In fact, in recent years there has been an explosion in the number of alternative financing options available to startups, including crowdfunding, revenue-based funding, and P2P lending. These options are often particularly attractive to European startups, as they often have more limited access to traditional financing options compared to their counterparts in the US.
Additionally, the collapse of SVB could create opportunities for other players in the market to step up and fill the gap. This could include both traditional banking services like loans and lines of credit, more specialised services like advice on IPOs and other fundraising activities, and providing networking spaces and opportunities for founders. In fact, many European banks have already been increasing their focus on the tech industry in recent years, with some launching dedicated fintech and innovation hubs to support startups. There has been a rise in the number of corporate venture capital funds and incubators in Europe, which are providing new sources of funding and support for startups across the continent.
Finally, it’s important to remember that the tech industry is famously resilient. This is an industry that has weathered countless disruptions and setbacks over the years, from the dot-com bubble burst in the 90s to the 2008 financial crisis. Throughout all of these challenges, the industry has continued to innovate and grow.
The Broader Economic Landscape
By most accounts, the US seems to have averted any doomsday scenarios stemming from the collapse of Silicon Valley Bank. The Federal Reserve even unexpectedly hiked interest rates once more, suggesting that it views the banking system as sufficiently calm that it can continue its battle against inflation. Despite this, recent troubling research has pointed to the fact that 186 smaller US banks are at similar risk if just half of uninsured depositors decide to withdraw. The problem here is that, just like SVB, the majority of their assets are held in government bonds and mortgage-backed securities, which are sensitive to interest rate rises.
Looking across the Atlantic, it would be remiss not to mention the curious case of Credit Suisse, which has been the problem child of European banking for quite some time now, plagued by scandals, losses, management shakeups and restructuring plans. It recently tapped the Swiss National Bank for “a large multi-billion amount” to secure its liquidity, partly because customers were withdrawing money, and partly because counterparties were demanding guarantees when doing business. Furthermore, the bank is set to be acquired by rival UBS in a merger engineered by Swiss authorities to prevent more market turmoil in global banking.
However, despite fears, economists have issued reassurance that other European banks are highly unlikely to be significantly impacted. Deutsche Bank, for example, has been affected by a panic-driven sell-off and a spike in the cost of insuring against its default, but this must be viewed in the context of ten straight quarters of profit and an extremely strong solvency and liquidity position. Panic-induced withdrawal of funds seems to be slowing, so it seems realistic to hope markets will settle back into some form of normality soon.
It’s also worth noting that the European Central Bank recently approved a large, half-percentage point increase in interest rates to try to curb stubbornly high inflation, saying Europe’s banking sector is ‘resilient’, with strong finances.
How Will The Recruitment And Talent Landscape Be Impacted?
It would be naïve to imagine that the turbulent economic landscape won’t have an impact on the investment many startups make in recruiting new talent. SVB in particular was a pioneer and lynchpin of a venture debt market that provided established startups with an alternative source of funding, and its demise may cause some organisations to make tough decisions over the coming weeks or months.
However, while the economic landscape for startups and scaleups remains tricky, this is all the more reason for organisations to invest in talented hires that will ensure they’re able to stay the course until the worst is over. People will always be a company’s most precious asset, along with the main driver of resilience and innovation in the face of difficulty. Multiple studies have shown that companies with a strong focus on hiring and talent management typically achieve up to four times revenue growth and two times higher profit margins compares to companies that don’t, and it’s easy to see why such factors take on an even greater importance in turbulent times.
Ultimately, while the collapse of Silicon Valley Bank is certainly a blow to the tech industry, it is not as bad as it may seem at first glance for European startups. There are plenty of alternative financing options available, and the economic shockwave looks set to be limited, especially in the long-term. The tech industry is nothing if not resilient, and there is every reason to remain optimistic.
At GR4, we work with Europe’s most exciting startups and scaleups to discover and place top tech talent. You can search all our positions here, or get in touch with a member of our specialist team for a confidential discussion.
For more information about how GR4 can support your startup hiring process, you can download our ultimate startup recruitment guide here. It covers everything, from why startups fail, to how recruitment agencies like GR4 can help you make your startup hiring strategy a success.
