The Downfall of SVB: What Will Happen to FinTech?

The business world was sent into a state of shock on March 10, 2023, as the Silicon Valley Bank, which was one of the largest banks in the United States, collapsed. This bank had a significant impact on tech startups and venture capital, making its failure particularly notable. Located in Santa Clara, California, the bank’s downfall was caused by a variety of factors, including a significant decrease in the value of its investments and the withdrawal of substantial sums of money by its depositors.

While bank failures are not uncommon, the collapse of the SVB drew particular attention due to its timing. It occurred during a time when many people in the United States were already concerned about the possibility of a recession, and it was the largest bank failure since the shutdown of Washington Mutual Bank during the financial crisis of 2008.

To gain a better understanding of what went wrong with the Silicon Valley Bank, it is essential to examine its history and the events that led to its collapse. Additionally, it is important to consider the bank’s impact on financial technology and how its failure may impact the industry moving forward.

What was the Silicon Valley Bank?

Silicon Valley Bank, a subsidiary of SVB Financial Group, ranked as the 16th largest bank in the U.S., with assets worth $209 billion as of December 2022. The bank provided the following:

• Various business banking services.
• Catering to companies at all stages.
• Focusing on financing tech startups and venture-backed firms.

According to the bank’s website, 44% of the tech and healthcare IPOs that received venture capital funding in 2022 were clients of Silicon Valley Bank.

History of Silicon Valley Bank

Bill Biggerstaff and Robert Medearis conceived the idea for Silicon Valley Bank during a poker game. In 1983, the duo partnered with the bank’s CEO, Robert Smith, to launch the bank’s first branch in San Jose, California. The bank became public in 1988 and relocated to Menlo Park in 1989 to establish its position in the venture capital industry.

Why did the Silicon Valley Bank collapse?

• From 2019 to 2022, Silicon Valley Bank experienced a period of substantial growth, acquiring significant deposits and assets. 
• While most of the bank’s assets were invested in long-term debts, such as treasury bonds, their value decreased when the Federal Reserve raised interest rates in response to rising inflation. 
• This resulted in the bank selling some of its investments at a loss, causing a $1.8 billion loss and ultimately leading to its closure.
• Furthermore, under the Dodd-Frank legislation, banks with assets over $50 million were subject to additional oversight and regulations. 
• However, in 2018, former President Donald Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law, which raised this threshold to $250 billion. 
• Despite being the 16th largest bank in the U.S., Silicon Valley Bank did not have enough assets to warrant the additional oversight and regulations that would have been in place if the threshold had not been increased.

A Timeline of Events 

• On March 8, Silicon Valley Bank revealed a $1.8 billion loss on its bond portfolio and announced plans to raise $2.5 billion by selling common and preferred stock. As a result, Moody’s downgraded the bank’s long-term local currency deposit and issuer ratings.
• The next day (March 9), SVB Financial Group’s stock plummeted at market opening, causing a ripple effect on other central banks’ stock prices. Additionally, customers began withdrawing their money, resulting in attempted withdrawals of $42 million.
• On March 10, federal regulators took over the bank, and trading of SVB Financial Group’s stock was halted. With no buyer found for the bank, deposits were moved to a bridge bank operated by the FDIC, with insured deposits promised to be available by March 13.
• In response to the bank’s failure, on March 12, emergency measures were announced that allowed customers to recover all funds, including uninsured deposits.
• Finally, on March 17, Silicon Valley Bank’s subsidiary group, SVB Financial Group, filed for bankruptcy.

Why is funding important for digital finance startups? 

Funding is crucial for financial digital finance startups because of the following reasons:

1. Money for business or product development

For any tech startup to grow, initial funding is one of the most crucial aspects. The initial budget is used to develop a product or service, and curating a product or service requires resources such as equipment, office space, and development fees. 

For example, marketing is an essential requirement for promoting a product or service to attract a high number of customers, and thus marketing is a costly tool. To obtain access to this tool, you would require capital. 

2. Money as a barrier to entry

Lack of capital is one of the most significant factors that stop people from beginning their businesses. That is why funding is crucial for startups, as it helps overcome the initial hurdle. 

Bootstrapping or taking out loans differs from the solutions that startup owners might use because of the risks associated with them and the time they may consume to get the business off the ground. Therefore, the ability to apply for funding gives owners a path to enter the market. 

3. Grow your network

Funding not only helps with establishing and developing startups but also helps in building networks. One way to accelerate a business’s growth is networking and associating yourselves with successful entrepreneurs to boost credibility. 

For example, if you contact a few investors on your hunt for funding, then even if you cannot gather funding, such connections may prove to be precious for the future.

4. Expand and develop

To expand your business by increasing the number of products and services offered, moving offices, or hiring more employees, money is necessary to scale successfully. 

5. Cash Flow

One of the reasons why funding is integral for startups is the cash flow or ‘safety net’ it provides you. For example, when you begin your business, there is a high chance that you will only be able to generate profit for a while, as all the money you obtain through funding will be used to establish your business, build your product or service and pay employees. 

Hence, funding is required to help the business survive and achieve profitability. Your revenue will be low and reinvested in the industry. Therefore, the budget provides firms with a runaway to develop and achieve profitability. 

The Effect of SVB Collapse on Financial Automation Startups 

The failure of Silicon Valley Bank can have significant worldwide implications beyond being a local issue, especially for FinTech startups. Here are some critical effects that could arise:

1. Difficulty in raising funds and need to change business models 

Investors and analysts believe that the collapse of SVB can make it harder for startups to raise funds. This could force them to reconsider their business models.

2. Increased focus on profitability and spending discipline

Startups may pivot towards profitability and be more careful with their spending following the collapse of SVB.

3. Challenges in managing finances and accessing capital

The loss of SVB’s services may make it more difficult for startups to manage their finances and secure the necessary capital to support their growth.

What are the Alternative Funding Sources for Tech Finance App Startups?

Several alternative funding sources are available for financial technology (fintech) startups that are beyond traditional venture capital funding. These are-

1. Crowdfunding

Crowdfunding refers to funding a project or venture by raising money from many people, typically through the Internet. It is a form of crowdsourcing and alternative finance. 

Fintech startups can use crowdfunding platforms such as Kickstarter, Indiegogo, and GoFundMe to raise capital from many investors. Additionally, crowdfunding helps improve the presence of small businesses and startups across social media, increasing their investment base and funding prospects.

There are various types of crowdfunding, such as equity-based, debt-based, cause-based, rewards-based, litigation, etc.

Advantages of Crowdfunding:

• It provides a quick way to secure finance
• Allows for feedback and guidance from investors
• Enables testing of public interest in the startup
• Offers easy tracking of project progress
• Provides an affordable source of finance

Disadvantages of Crowdfunding:

• Not all projects may attract public interest
• Significant marketing resources are required to promote projects
• It may not result in the total financing of the project
• Negative feedback can harm the reputation of the business
• Lack of confidentiality for project details

2. Angel Investors 

Angel Investors are high-net-worth individuals who use their money to offer financial backing to small startups and entrepreneurs, usually in exchange for ownership equity or convertible debt. 

Such investors support businesses at the beginning or challenging stages when only some investors are interested in taking the risk. Hence, fintech startups can look for angel investors who have experience in the financial industry or show interest in the potential of the fintech market.

Advantages of Obtaining Investment from Angel Investors:

• No need to provide collateral such as personal assets
• No repayment obligations or interest on investment
• Improved discipline due to external monitoring and oversight

Disadvantages of Obtaining Investment from Angel Investors:

• Finding a suitable angel investor for the startup can be time-consuming
• Limited structural support available from the investor

3. Accelerators and Incubators 

Accelerators and Incubators are different programs that provide fintech startups with mentorship, resources, and funding in exchange for equity. Such programs last for several months and reach a demo day where startups are given a chance to pitch their ideas in front of investors.

Advantages of obtaining investment from Angel Investors:

• You get access to guidance and mentorship from experienced industry professionals. 
• You get networking opportunities with other entrepreneurs and investors
• You get access to office space, equipment, and legal and accounting services.
• Increased exposure to potential investors through demo days and pitch events
• Opportunity to learn and develop skills in a supportive environment.

Disadvantages of obtaining investment from Angel Investors:

• It can get highly competitive to gain entry into the program.
• May ask for a significant equity stake in the startup in exchange for participation.
• The programs typically have a set duration, which may need to be increased for startups.
• It may need to provide more customized support for the startup’s specific needs.
• Expectations for progress and growth may be high and unrealistic.

4. Corporate Partnerships 

Corporate partnerships refer to collaborative relationships between two or more businesses with complementary interests, goals, or services. Such partnerships can take many forms, like joint ventures, strategic alliances, or co-branding executives. 

Hence, emerging fintech startups can collaborate with established financial institutions such as banks, insurance companies, and other financial providers to access resources and funding. 

Advantages of Corporate Partnerships 

• Access to resources
• Credibility
• Funding 
• Reduced Risk 

Disadvantages of Corporate Partnerships

• Loss of control
• Slow decision-making
• Limited Flexibility 
• Cultural Differences 

5. Government Grants

Government grants refer to funds or other assistance the federal government provides to individuals or organizations for a specific purpose. Thus, fintech startups can apply for government grants to fund research and development for their projects. 

Advantages of Government Grants

• Non-dilutive funding
• Can provide financial stability
• Validation of the business model
• Access to networks and resources

Disadvantages of Government Grants 

• Competitive and Selective
• Stringent eligibility criteria
• Time-consuming application process
• Limited funding and slow disbursement 

6. Cryptocurrencies

Fintech startups can use cryptocurrencies like Bitcoin or Ethereum to gather funds via Initial Coin Offerings (ICO) or Security Token Offerings (STO). Hence, it allows startups to raise capital directly through investors.

Advantages of Cryptocurrencies

• Decentralized funding source
• Access to global markets
• Lower transaction fees
• Anonymity and security

Disadvantages of Cryptocurrencies

• Volatility and uncertainty
• Regulatory challenges
• Limited acceptance as a payment method
• Several complexities and technical barriers

7. Revenue-Based Financing 

Revenue-based financing, also known as royalty-based financing, refers to the type of financing that allows startups to receive funding in exchange for the enterprise’s ongoing gross revenues. 

Advantages of revenue-based financing:

• No equity dilution
• Repayments are based on revenue, so it aligns with the startup’s performance.
• Typically a faster process than traditional financing options
• Investors have a vested interest in the startup’s success

Disadvantages of revenue-based financing:

• Generally more expensive than traditional financing options
• Can be difficult for startups with unpredictable revenue streams
• Investors may demand a high percentage of revenue, limiting cash flow for the startup
• Limited availability of revenue-based financing options compared to other financing options

8. Alternative Lending Platforms

Alternative lending platforms provide loans to small businesses, including fintech startups. It can prove to be really efficient for startups that require funding urgently and have a strong business plan in place. For example- LendingClub and Funding Circle

Advantages of alternative lending platforms:

• Typically faster and more accessible than traditional bank loans
• Easier to qualify for than traditional bank loans
• Can be a good option for startups with less established credit histories
• Often offer flexible repayment terms

Disadvantages of alternative lending platforms:

• Generally have higher interest rates than traditional bank loans
• May have additional fees and charges
• Lenders may have more stringent eligibility criteria than those advertised.
• Less regulatory oversight than in traditional bank loans, which can increase the risk

Thus, various alternative funding sources are available to fintech startups beyond traditional capital funding. Each method has advantages and disadvantages, and startups should consider every way carefully before choosing the option that best fits their project’s needs and requirements.

What are the strategies for the development of Financial Innovation App Startups?

Emerging fintech startups or companies should focus on innovation, technology, customer service, and regulatory compliance to grow and succeed in the field. Hence specific strategies that fintech companies can utilize to develop in the industry are-

1. Identify a specific niche. 

The fintech industry is enormous, and there are several areas in which fintech companies can specialize, such as payments, lending, investment, and insurance. Thus, by focusing their attention on a particular niche, fintech companies can offer more targeted solutions and establish a loyal customer base.

2. Prioritize user experience

Making the user experience a top priority is crucial for fintech startups. This means designing an app that is user-friendly, easy to navigate and meets the needs of the users.

3. Offer distinctive features

Incorporate innovative features in your app that solve real-world problems and set it apart from others. This will help in attracting and retaining customers by providing a unique value proposition.

4. Utilize technology to improve user experience.

Fintech startups should invest in technology to create innovative solutions for customers to make their financial processes hassle-free, less time-consuming, and more accessible for them. 

Such as utilizing mobile apps or online platforms can make financial services seamless and convenient for users leading to increased adoption and usage. 

5. Team Up with traditional financial institutions 

Fintech companies and startups can partner with traditional financial institutions to provide a broad set of services as it can aid them in accessing a large customer base and gain an advantage from the established infrastructure of the financial industry.

6. Prioritize data security 

Fintech companies tend to deal with sensitive information, so it is integral to prioritize data security. It involves using encryption technologies, secure payment gateways, and implementing stringent data protection policies to ensure that customer data is safe.

7. Utilize data analytics

Collect and analyze user data to gain valuable insights into their behaviors and preferences. This information can assist in making informed decisions about app development and marketing strategies.

8. Form Strategic Partnerships

Collaborate with established financial institutions, such as banks or credit card companies, to gain access to their customer base. This partnership can provide opportunities for growth and increased market penetration.

9. Focus on customer acquisition and retention.

Fintech companies should prioritize customer acquisition and retention to help develop a loyal customer base. Targeted marketing campaigns, offering personalized solutions, and excellent customer support are some ways it can be achieved.

10. Global Expansion

Fintech companies must consider expanding their services to different countries. The expansion will bring them closer to new markets, diversify their revenue streams, and gain a broader customer base.

11. Stay up-to-date with industry trends 

Always stay updated with the updated trends in fintech and adapt your strategy accordingly to stay competitive. 

12. Offer efficient customer support

Providing excellent customer support can help you in securing a loyal customer base as well as encourage them to use your app more frequently. 

13. Keep up with regulatory changes.

As fintech companies function in a highly regulated industry, thus they should prioritize staying up-to-date with any regulation changes. It can help them avoid legal issues and ensure their services comply with regulatory requirements. 

Conclusion

The recent downfall of Silicon Valley Bank has sent shockwaves through the business world, especially in the financial technology industry. It is clear that this failure will have far-reaching effects, including the potential for a global financial crisis, the rise of alternative funding resources, and heightened regulatory scrutiny. As a fintech startup looking to grow your business, it is critical to carefully consider your strategies and methods for growth before implementing them.

If you find yourself in a perplexed state and are unsure where to turn for guidance, Idea Usher is here to help. Our team of experts has a wealth of experience in the fintech industry and can provide tailored guidance and support to help your business grow.

All you need to do is contact us with your project requirements, and our team will work closely with you to deliver effective solutions. We can help you with everything from market research and product development to funding strategies and compliance.

By working with Idea Usher, you can rest assured that you are getting the best possible guidance and support to help your business thrive. So why wait? Contact us today to learn more about how we can help you achieve your business goals.

Contact Idea Usher!

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FAQs

Q. What is Financial Technology?

ANS: Financial Technology or FinTech refers to the firms that utilize new technology to compete with traditional financial methods in the delivery of financial services.

Q. What are Angel Investors?

ANS: Angel Investors are high-net-worth individuals who use their money to offer financial backing to small startups and entrepreneurs, usually in exchange for ownership equity or convertible debt.

Q. What are the strategies that FinTech apps can deploy for development?

ANS: There are different types of developmental strategies that utilize to grow their startups, such as identifying a niche, prioritizing user experience, offering excellent customer support, etc.

Q. How can Idea Usher help you with your project?

ANS: You contact Idea Usher with your project requirements, and our team will work closely with you to deliver effective solutions. They will help you with everything from market research and product development to funding strategies and compliance. By working with Idea Usher, you can rest assured that you are getting the best possible guidance and support to help your business thrive.