The Cautionary Silicon Valley Banking Tale

As every medical device startup firm knows, getting investment for a new product concept is a tremendous challenge. One can have the best idea in the world but if you can’t get the financing to support its development, there’s not much hope for the idea to become a reality.

Arguably worse, however, is having the necessary funds but simply being unable to access them. That’s essentially what happened for a brief period in the first half of March when it was announced Silicon Valley Bank had been closed and the fate of money held there was (for a time) in question.

Silicon Valley Bank, according to its own website, “provides products, services and strategic advice to help you turn your big ideas into a great business.” It was closely aligned with tech startups, including those within the life sciences space. So it stands to reason to ask what this bank’s failure means for the medtech startup industry.

According to Amy Brown, author of an Evaluate Vantage article that examined the situation and its impact on the life sciences sector, there are a number of potential buyers for SVB’s parent company—SVB Financial. (The cited Reuters article, however, indicated the interest had cooled from both PNC Financial Group and Royal Bank of Canada.) Regardless, Brown’s original point remains: as the life sciences segment was a small part of the overall focus of SVB, it could be even less of a priority for a new, larger firm. That means financing could be even tougher to come by for medtech startups.

That’s just one potential factor to consider from this bank’s failure. Another is the prospect of finding a new organization with which to work to fulfill a company’s financial needs. According to an article in Inc. focused on where founders will bank, 82% of startups “would move funds to a more ‘dominant’ financial institution.” The article also noted “nearly 60% of founders say that they will ‘definitely’ diversify company funds, while another third of respondents are ‘potentially’ weighing diversification.”

Most have heard the expression “Don’t put all your eggs in one basket.” Well, that’s exactly what a number of early-stage companies are doing. They have identified a financial partner with favorable rates or services that align well to their needs and they are “all-in” with that organization, leaving them vulnerable. Granted, SVB’s collapse was not a typical situation, but we’ve seen the banking industry face challenges previously. Were lessons not learned?

Next question: How much does a company need to diversify to play it safe? Likely something none of them have a firm handle on, and even more likely, something you’ll get different answers on when the question is posed to financial experts and advisors.

“I think that’ll be sort of the question du jour,” Justin Barad, the founder and CEO of Osso VR (a San Francisco-based immersive surgical training platform), was quoted as saying in the Inc. article. “Up until now, the banking strategy was to just work with SVB. And there were a lot of incentives to keep you at SVB and keep all of your banking in one place.”

Barad moved the company’s financials to two organizations—Pinnacle Financial Partners and Valley National Bank—citing several reasons for the selections, including relationships and reputation. Hopefully, this will be the last time Osso VR and Barad have to deal with such a situation, but it may not be. The article cited data from the FDIC, stating 563 banks failed between 2001 to 2023 in the U.S.

Fortunately, Barad’s company’s funds as well as those of many others were announced to be fully protected by the FDIC. On March 12, the Treasury, Federal Reserve, and FDIC issued a joint statement. “After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank…in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution…will be borne by the taxpayer.”

A sigh of relief for startups and consumers alike, but what happens if the instability in the banking sector remains such that other financial institutions collapse, requiring further support from government agencies? As of Dec. 31, 2022, Silicon Valley Bank had approximately $209 billion in total assets and about $175.4 billion in total deposits. That’s just one organization. Can the U.S. government support many more similar situations?

Hopefully, we don’t have to get an answer to that question. In the meantime, I hope everyone treats this as a cautionary tale and revisits where and how their finances are being handled. 

Sean Fenske, Editor-in-Chief
[email protected]