SVB’s meltdown is the biggest opportunity for European tech to take a leadership role in the industry
In this guest article, Gilles Samoun, Founder of cybersecurity start-up Qualys and SaaS solution Successeve, discusses SVB’s meltdown representing the beginning of European start-ups taking a leadership position in the sector.
People outside Silicon Valley might not know it, but SVB was founded close to 40 years ago and has been an integral part of the history of Silicon Valley’s tech ecosystem ever since. The bank prides itself on catering to entrepreneurs and understanding their needs better than anyone else on the market. It’s earned its prestigious reputation from how exclusively it operates. To get access to SVB, you typically need an intro from a reputable VC or someone banking there.
I experienced this myself in 2000, shortly after raising a funding round from Bessemer for my start-up Qualys. With an intro from a Silicon Valley-based venture capital firm, I opened a business account with SVB. As a European entrepreneur, it was quite an experience. I personally was welcomed by one of the directors at SVB in a big office, with a warm welcome letter. Client relationships at SVB are personable, the attention to clients is exceptional.
The immediate reasons for the crisis boil down to SVB’s business model – which entrepreneurs love for its agility. SVB has two kinds of services for businesses. Deposit accounts and venture loans, meaning the ability to loan your money out. Lately, it looked like 50% of the business was money dedicated to these loans. In fact, for the last five to ten years, the majority of larger rounds coming out of the US tech sector were in fact, half equity and half debt.
What happened last week was unheard of $42bn, equivalent to 30% of the bank’s customer deposits, was withdrawn in a day. No bank can resist that and so naturally, panic ensued, and local talks of SVB’s imminent failure become global within hours. Luckily, the US government stopped the crisis by making sure the FIDC and Fed stepped in on time to ensure that anyone banking with SVB could get access to the entirety of their funds in a timely manner.
A massive systemic crisis was avoided in the immediate term, however, this has two adverse effects in the US. Firstly, SVB will not be honouring loans it had committed to in the past year, leaving dozens of US startups and scale-ups cash-strapped. And secondly, perhaps more long-lasting, this has created further mistrust of the banking system and neo-banks, which have already suffered from the BTC and FTX crises in the recent months.
The situation is fragile and uncertain for the US tech sector, and this creates an opportunity for Europe.
Culturally, Europe is more financially conservative and risk-averse. In sharp contrast to the US European tech businesses raise capital but very rarely raise debt. In a way, by being more conservative on cash, they are in a better situation to resist the crisis which extends way beyond SVB: the Ukraine war and the subsequent inflation and rise in interest rates is something Europe is way better prepared for.
Secondly, the difficulties the US tech ecosystem is facing creates an opportunity for European competitors to survive and maybe even take over and grow into the US market. From e-commerce to climate tech to Saas models, if US businesses are suffering, well-funded and financially healthy European counterparts are well positioned to take on the US.
Lastly, the first signs of this industry-wide crisis in the tech sector date back to the last 12 months, where foolish valuations were feeding a massive bubble in the tech sector. As a result of this appetite for investing in tech, many companies were offered cash they frankly didn’t need, and ended up taking it as a security.
In Europe, companies benefited from this overvaluation trend and also ended up taking cash, but with a much more conservative approach on spend, as explained above. It was a great call because today, with crippling VC activity, everyone really does need this cash, and more rugal Europeans are buying themselves extra time and a longer run rate. Capitalising on the US-led tech bubble has worked out well for Europe.
The next few months will tell, but Europe looks better equipped to weather this storm.