Jonathan Nelson had secured commitments of $2 million in new funding for his fintech startup, HF.Capital, from two investors last month. His goal was $2.5 million and he thought securing the rest would be “shallow.”
Then 67 investors turned him down. In mid-March, the initial investors in him also withdrew.
Mr. Nelson was initially confused by the indifference. But two days later, when Silicon Valley Bank, the most prominent bank for venture capital firms and start-ups, collapsed after tech investors and start-ups triggered a run on the bank, it all made sense.
“I was scratching my head and saying, ‘Why did they just get ghosted?’” he said. “Then the bank run happened and I was like, ‘Oh, they’re terrified.'”
The same realization is spreading through the startup world in the wake of SVB’s sudden failure. After a harrowing 2022, when the easy money for start-ups dried up, leading to slashed valuations, lowered ambitions and widespread layoffs, many expected things to pick up this year. But SVB’s collapse has further stoked anxiety and fear, which is beginning to manifest in start-up deals across Silicon Valley.
On Sunday night, First Citizens BancShares acquired SVB. The failed bank’s former parent, SVB Financial, filed for bankruptcy on March 17 and plans to run a separate process to sell several units.
In the past two weeks, as regulators have scrambled to find a buyer for SVB, companies that have relied on it for credit lines have scrambled to secure a new source of debt. Investors, wary of risk, have increasingly chosen to sit on the sidelines or are too busy helping prop up existing startups to consider new deals. And some young companies are doing everything they can to avoid raising new funding so they don’t have to deal with lower valuations, onerous conditions and strict due diligence.
The result is that a cold environment for tech startups has quickly gotten colder.
“People are realizing that it’s probably not going to get better,” said Mathias Schilling, an investor at venture capital firm Headline. “It was a huge shock to the system.”
He said the bank run that led to SVB’s demise showed how much fear was already in the market. Investors wouldn’t have triggered such a panic if they weren’t already nervous, he said.
The SVB collapse was not directly caused by the tech downturn, and startups that banked there will not lose their deposits as the Treasury Department and Federal Reserve eventually guaranteed all SVB deposits. But the institution’s implosion comes on top of a 61 percent drop in venture funding in the last three months of 2022 from a year earlier, according to PitchBook, which tracks start-ups. Kyle Stanford, an analyst at PitchBook, said he expected SVB’s collapse to “accelerate” the market downturn that was already taking place.
“We’ve been in a business slowdown for a year,” he said. “This is just the kind of additional problem that the market didn’t need.”
in a survey Of 870 founders conducted last week by venture capital firm NFX, 59 percent said the collapse of SVB would make an already difficult fundraising market more difficult. Twenty-two percent said they were concerned that they would not be able to raise funds this year.
Techstars, a start-up investment firm that has backed 3,500 start-ups, advised its companies to call their shareholders for more money before attracting new investors, said Maëlle Gavet, the firm’s chief executive. Techstars has also tried to lower entrepreneurs’ expectations of how much their company is worth, urging them not to think of lowering their valuations as a failure but as a positive sign that someone is willing to invest in their company.
Ms Gavet said she expected a lot of talk to take place this summer about whether start-ups should close or sell. “The whole SVB thing created a greater sense of danger,” she said.
Bijan Salehizadeh, an investor who owns stakes in a dozen venture capital funds, said between a quarter and a third of the companies backed by his funds will run out of money in the next six months. He called this “the worst time in recent memory to raise new venture funds” and added that he had seen many investors “sitting on their hands” recently because they were nervous.
Ayham Ereksousi planned to raise $4 million for his start-up, Stomio, which provides software to help companies test new products with their customers. But he has lowered expectations of him. He had been in contact with between six and eight investors who expressed interest in investing late last year. But in recent weeks, as he tried to raise money, many either didn’t respond or said they had changed his investment strategies.
Now, Mr. Ereksousi is contemplating raising less money from his existing investors and returning next year for a bigger round of fundraising. This year is likely to be a “bust,” he said, and concerns about the health of banks are “throwing ice water over the entire funding ecosystem.”
If start-ups can’t raise venture funds, there are few lifelines available. Stock market volatility has made initial public stock offerings virtually impossible, while big tech companies come under antitrust scrutiny and face their own financial pressures.
SVB offered many start-ups a form of credit that other banks considered too risky, as young companies are generally not profitable. That debt, typically secured by start-up venture financing, helped companies stretch their money for their next round of financing.
“It’s another source of capital that’s pulling out,” Zane Carmean, an analyst at PitchBook, said in a recent investor webinar titled “Has the Music Stopped?”
Mr. Nelson, the founder of HF.Capital, was previously a venture capitalist and has a portfolio of 75 investments. Before SVB’s fall, he told those companies that funding could start flowing again in the spring. He now recommends that they wait until September to raise money. Those in dire need of cash may have to find a way to become profitable, he said.
That is his plan for HF.Capital. Mr. Nelson wanted to use the $2.5 million to obtain regulatory licenses for a software product that would enable international stock trading. But with investors on the sidelines, he now plans to “jump start” the company or grow it using profits rather than outside financing.
“It’s just a brick wall,” he said. “No one is writing checks right now.”
