The collapse of Silicon Valley Bank (SVB) and subsequent federal takeover could have a significant impact on the behavioral health startup ecosystem.
On Friday, the big California bank that catered to startups and tech investors collapsed after failing to raise capital. Since then, Signature Bank and crypto bank Silvergate have also collapsed.
SVB’s demise could have long-term implications for behavioral health companies with debt or equity relationships with the bank, as those companies may find a new shareholder or seek a new line of credit. At the macro level, the failure of the SVB signals to startups that the market is changing – and the availability of capital and debt is becoming scarcer.
“It’s just another signal for health technology founders that the world will be different in 2023 than it was in 2022 and 2021,” Michael Yang, managing partner of venture capital firm OMERS, told Behavioral Health Business. “Treat every dollar you have like it’s your last and be super efficient with your business. So it just confirms that we are in that world and not the world where you can raise lots of money, splash the money around and try lots of different things that you weren’t quite sure about.
In the past, SVB has participated as a venture capitalist in funding rounds for behavioral health companies Circulo Health, a mental and developmental disabilities provider, and Concert Health, a behavioral virtual startup focused on collaborative care. SVB has also served as a lender to behavioral health companies, providing venture debt for pediatric behavioral health company Brightline, autism provider Cortica and children’s telehealth service Hello Hero.
“SVB was not just a commercial bank taking deposits from these venture capital-backed behavioral health companies, it was also at times a venture capitalist itself. They have invested in some of the startups and acquired stakes,” Yang said. “Then obviously they were a lender to some of these startups. And then there is often also a limited partner who invests in health tech funds who may have also invested in the same behavioral health startups.”
The fall of the SVB could be particularly problematic for companies with venture debt arrangements with the bank.
“You are one of the founders of this great telemedicine business and you also got SVB to give you $3 million in venture capital should you need it later this year. It’s pretty safe to assume that $3 million in debt is no longer available,” Yang said. “A new owner of the SVB and these assets would have to decide whether to cash them in. … If you were expecting to get there by the end of 2023 or by 2024, now is the time to find new sources of venture capital or new sources of capital to do it.”
Another downside to finding a new lender is that debt will likely be more expensive than SVB due to rising interest rates. Additionally, lenders also took a much more conservative approach in early 2023, only funding rock-solid deals.
This thought was among the topics discussed at the McGuire Woods Healthcare Private Equity and Finance Conference in Chicago in early March.
“Before that, we’d kind of kick the tires and maybe circle the car a few times,” Elizabeth Vosnos, managing director of health care debt capital markets at Fifth Third Bank, said at the event. “Now we disassemble it and take a toothbrush with us. I think there’s also a renewed focus on credit quality…the risk/reward tradeoff.”
Fifth Third Bank, the principal subsidiary of Fifth Third Bancorp, is one of the largest banks in the Midwest. Fifth Third was even hurt by the fall of SVB, whose shares plummeted in early trading on Monday.
Broader implications
Not only companies with debts at the SVB could be affected. SVB has also participated in several startup financing rounds through its SVB Capital fund, which is also looking for a buyer.
If SVB Capital is sold to another bank or financial institution, the new owner will dispose of this equity. This new owner may or may not choose to participate in future funding rounds. Still, Yang noted that SVB typically didn’t hold a significant position in any particular startup.
“It wasn’t like they owned 20%, owned 50%, owned 10%. Maybe they were a small one percentage point owner of a startup,” he said. “So if they didn’t choose to keep writing more checks, other investors could theoretically help fill in and fill the gap on that front.”
As for companies with a deposit relationship with SVB, Yang said it caused temporary destruction but not necessarily long-term problems. On Monday, the federal government announced it would support SVB deposits beyond the federally insured maximum of $250,000.
“The government has set a precedent with SVB and Signature, [saying] We will secure and guarantee your deposits. You’re good on that front,’ he said. “I think the best course of action most startups are taking right now is to open multiple commercial bank accounts.”
