The collapse of Silicon Valley Bank (SVB) is important to the wider economy beyond merely the shockwaves affecting the global banking market. Funding through specialist, startup oriented companies such as SVB provide vital lubrication and pump priming to one of the most important drivers of growth in modern economies.

As any small business manager will tell you, cashflow is king. Many an ostensibly successful small business has been undone by an interruption to cashflow that is often not the fault of any bad business practice. Often, it can be the impact of a larger business being slow to pay a bill for no other reason than corporate inertia.

For startups, this is even more true. Newer companies have less in-built resilience and are often reliant on a small number of people, or even a single individual working long hours for little or no return. They tend to be reliant on a single client or a small group of key clients. Startups also have a desperate need for capital just to get off the ground.

The kind of startups being supported could be the next big thing in entertainment technology, a step forward in green energy generation, or a breakthrough medical technology. At the recent MWC 2023 conference in Barcelona, the startup developer community was repeatedly highlighted as a key avenue for telecoms service providers monetizing their investment in 5G network infrastructure through the creation of new use cases. The conference also highlighted the rapid benefits in terms of business efficiency and worker safety – benefits that may be lost without the right funding environment.   

Support and protection

At a time when macro-economic conditions are already challenging and investing in new technologies is increasingly expensive, it is vital that support is provided to startups. Fortunately, the US and UK governments have already stated that there will be support and protection to small businesses affected by the demise of SVB. Both governments have recognized the long-lasting damage to economic growth that will occur if the shockwaves become new earthquakes.

There is also a need to consider how startups are funded. This does not mean that they can never be allowed to fail – there are many bad ideas out there. But there is also an inherent risk in merely leaving things to the market. At times of plenty, capital is abundant, but when things become more difficult, there needs to be more ways to stimulate new growth.

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By GlobalData

SVB and sector risk

The decline of SVB was also exacerbated by the promotion of SVB by key venture capitalists, which had the effect of skewing the market toward a single bank, particularly in California, creating excessive sectoral risk. There is a need to ensure a diverse range of funding sources for startups.

In the technology industry, this need has been recognized as vendors and service providers already invest billions in startup incubation schemes. These businesses are of course hoping they will be able to spot and acquire or invest in small businesses with the next killer business solution at an early stage. But there is also an acknowledgement that the growth of small businesses generates a usage of technology solutions. Investors in technology companies also need to stay committed to these incubation schemes, even as the cost of doing business rises. Killing future use cases is killing future growth. There is also a need for governments to consider less ad-hoc support schemes and further examine how, for example, tax systems can make R&D and supporting startups more affordable and less risky.