'The start-ups are just about alright': SVB fallout throws focus on UK tech capital demands

by Rachel Lewis in London, with additional reporting by Josh O'Neill and analytics by Jonathan Klonowski
14 March 2023

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Start-ups in the UK should emerge dazed but unharmed following the emergency buyout of failed lender Silicon Valley Bank (SVB), market participants in the space have told sister publication Mergermarket, with several saying that it might cause a small dent in confidence but should not be seen as a wider reflection on venture capital nor the tech sector.

"A lot of the affected companies have gained [venture capital] investment because of fundamentally good technology or business model – that fact is still exactly the same as it was last week," said one growth equity investment banker. "All they have done is move money from one bank to another."

The UK government- and Bank of England-engineered sale of SVB's UK operations to HSBC yesterday (13 March) has largely reinforced certainty that the tech is still as investable as it was last Wednesday. SVB UK holds some GBP 7bn in customer deposits, with the UK's deposit guarantee scheme only covering the first GBP 85,000 in the event of a bank collapse. Hence several nervy founders and CFOs over the weekend.

Yet even before the latest drama, these executives were already tackling a capital headache. So far this year, UK start-ups have raised just GBP 1.2bn in equity compared to GBP 4.6bn over the same period in 2022, according to Dealogic data.

Fearful of a down-round akin to Klarna's 85% drop in valuation, many have – perhaps counterintuitively – reacted to a rising cost of capital by plugging the gap with venture debt or other non-dilutive capital solutions.

Last month, UK-based vehicle financing firm Carmoola raised a Series A, comprised of GBP 8.5m in equity and a GBP 95m debt facility from Natwest to help scale its business. Tech valuations took a knock and the cost of capital became an ever hotter topic last summer, UK-based digital healthcare start-ups like Cera Care were turning to debt and equity mixes.

Nothing ventured…
Here's where SVB comes in. It had been one of the key players providing these alternative capital solutions, providing venture debt, growth loans and credit lines, mezzanine loans and buyout finance.

The bank said in its H1 2023 report that the "party is over" with valuations returning to normal and early-stage companies, in particular, seeking higher liquidation preferences that "protect founders from the bad optics" of a valuation hit but make it harder to bring in new investors that will insist on the same terms.

Private lenders have been on the front foot trying to pitch their solutions, according to one investment banker, although venture debt funds themselves are still relatively small when compared to the needs of the market. Hambro Perks and Shard Credit both held first closes last year at GBP 100m and GBP 75m, respectively.

The question now is what HSBC will do with its new book. The breakneck pace of the deal means that the due diligence of unearthing exactly what they have bought has only just started. One fund manager speaking to Mergermarket said they were worried the bank will pay less attention to early-stage biotech due to the higher risk profile, while noting the deal will include the movement of people that can plug a knowledge gap.

It's worth noting HSBC has already made an initial move into tech capital solutions, having launched a "growth lending" offering for high-growth tech businesses in July 2022.

The GBP 250m fund provides access of up to GBP 15m to start-ups, "targeting IP and tech-rich businesses in cloud or software, healthtech or edtech, fintech or advanced manufacturing", according to an HSBC press release at the time. It sits alongside other funds including HSBC UK's GBP 500m fund for SME tech businesses.

SVB UK depositors can rest easy now. But when rising capital cost pushes tech execs towards more costly debt for fear of marking to market a dented equity valuation, further funding obstacles may prove more challenging to navigate.