What Does SVB’s Sale Mean for Startups and VC Funds In Latin America?

First Citizens’ purchase of Silicon Valley Bank’s assets will unlikely avoid a change in the risk model adopted by startups in the region, according to experts consulted by Bloomberg Línea

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Bloomberg Línea — US bank First Citizens bought Silicon Valley Bank after the so-called ‘startups’ lender’ collapsed and was intervened by the FDIC. But even with the sale of the SVB’s assets, the traditional path of Latin American startups and venture capital funds of having their money entrusted to SVB will now change.

For Bernardo Brites, CEO and cofounder of Trace Finance, a Brazilian startup that opened an entity in the United States to serve and bank ‘orphaned’ founders in the wake of SVB’s collapse, some kind of change should be expected.

Brites says he believes that there will be a simplification of SVB’s portfolio, even if First Citizens takes over the entire portfolio of loans and deposits.

According to Brites, First Citizens is currently restricted from opening accounts for Brazilian startups with a holding company in the Cayman Islands, a pass-through structure in Delaware, and operations in Brazil, and it remains to be seen whether the North Carolina-based regional bank will absorb startups, such companies that SVB used to accept.

And founders “are not going to want to buy into that risk,” Brites said.

This diagnosis will be put to the test in the coming months. Last week, for example, Henrique Dubugras, Brazilian CEO and cofounder of US-based fintech Brex, transferred $200 million of his company’s cash to SVB, pointing out that it was a diversification strategy.

The entrepreneur clarified that those assets were transferred from Brex itself, and not from the fintech’s clients.

“We don’t believe in keeping the money in just one bank, but rather spreading it in several. And I think SVB is one of the safest places to have your money right now. And our companies that are customers are doing the same,” Dubugras said in an interview with Fox Business last week.

What was special about SVB?

The concept of Silicon Valley for technology as it is known today was born in 1980 with the IPO of three companies: Apple, Genentech and Digital, says Brazilian Andre Vellozo, CEO of Drumwave, a Palo Alto-based company.

“At that time there were no more than half a dozen venture capitalists. After those IPOs, the number of venture capital funds grew 500-fold.”

The SVB team was known by and close to Silicon Valley executives, in a relationship of trust built up over years with many deals and investments. It is not yet known whether, with the acquisition, First Citizens will keep the same team as SVB, but, according to Brites, “there will probably be a change in the risk appetite and profile of the clients that were served by the old SVB.”

“We understand that most likely they will focus on a specific vertical, maybe banking only US-based venture capital funds that have a structure in Delaware, and maybe banking only US startups. We understand that there will be a reduction in risk appetite to avoid something similar to what happened with SVB,” said the Trace Finance entrepreneur.

SVB had to assume losses because it had deposits from startups invested in long-term fixed assets, maturing in five to 10 years; with the changes in bond prices, interest rate increases, and the reduction in deposits from risk companies, there was a mismatch between assets and liabilities that led to the need to recompose the capital base.

SVB’s recognition that it had to raise funds fueled fears of insolvency, which in turn led to the bank run. Brites said that Trace Finance is only investing funds from its client startups in short-term assets in order to ensure daily liquidity.

A shift in the VC industry

Beyond changing the traditional path of opening accounts at SVB by Brazilian companies that had an offshore structure, the SVB breakup may change the entire venture investment model in Silicon Valley, according to experts.

In the last 20 years, venture capital activity has grown and expanded around the world, with processes created and professionalization.

“Corporate Venture [known as CVC] for example has taken on a significant dimension. But a lot of people got into the business with an exclusively financial perspective, and that, although it brought a lot of liquidity until last year, had its price,” Drumwave’s Vellozo said.

Venture capital investments in technology companies require a lot of knowledge and experience, according to the seasoned Silicon Valley entrepreneur. “It may sound strange, but I don’t see venture practice as a category of finance,” he said.

For Vellozo, the SVB collapse hit the heart of Silicon Valley and was not an isolated event, nor was it limited to the financial system. The collapse of the startups’ and VC funds’ bank shows that the Silicon Valley model “has reached a limit, bringing to the surface deep questions of trust, ethics, and regulation, which at this time return directly to the Valley from various directions”.

Vellozo said he believes there will be new models for investment and new ways to scale startups, given that in recent years, “what should start with a fundamentally challenging purpose, like sending a man to the moon or Mars, or an idea that attracted people like engineers, designers, product professionals and entrepreneurs, and then spawned a company that attracted capital, turned into the opposite. That is, companies that started from invested capital”.

“Perhaps we have developed an inverted idea of what is easy and what is hard. Elon Musk stood out during this whole phase precisely because he attacked problems whose purpose was fundamental,” he said.

Implications of the model that led to the collapse

The increase in interest rates was a significant factor for the SVB crisis. Vellozo recalled that in May 2022, when the Nasdaq fell 28% year-to-date - that is, in less than five months - Sequoia Capital, a key player in Silicon Valley’s venture capital and technology ecosystem, published a letter pointing out the risks and potential impact of rising interest rates.

“What surprised me most about the SVB case was how the bank run unfolded. Not to mention the fact that it was started by Peter Thiel and other venture capitalists, and that, as Scott Galloway pointed out, it could have been stopped with just one tweet. It was the first time in market history that a bank run was precipitated by social media and carried out via online banking. Customers didn’t have to physically go to the bank to withdraw their money and $42 billion came out in less than 48 hours.”

For Vellozo, this scenario highlights the fact that the infrastructures of big tech companies and finance are colliding, and that it is not only the ‘valley’ that is in transformation and will have to reinvent itself.

“The technology paradigm is shifting from software to data, and this time it is not a domestic phenomenon that is then internationalized. This is the first time that a transformation with this scale has happened globally and at about the same time. The way in which people engage with technology is going to change,” said the entrepreneur, whose startup focuses precisely on the value of data.