It's been a year since Silicon Valley Bank (SVB) imploded, taking with it a handful of other major capital sources and countless startups and investors. When the collapse took place, the VC-backed companies with SVB had to decide quickly whether to stick with SVB (acquired by First Citizens Bank). Other options included borrowing from other banks or from non-bank lenders, which use LP capital to issue venture debt to VC-backed companies.
These were big decisions with big costs and sweeping impacts on the Innovation Economy. For context, in 2021, SVB's portfolio of private, mostly VC-backed companies in technology, life sciences, and healthcare was worth $5.5 billion. In 2022, SVB accounted for close to 50% of VC-backed tech and life science companies.
One year ago, SVB’s venture debt portfolio was 60%-70% of that market. Since then, the turbulence has not subsided. Between 2022 and 2023, venture debt deal activity dropped by $7.7B (total value). In late 2023, we saw public equities recovery, the likely end of interest rate hikes, and banks returning to a willingness to balance risk/reward to do VC lending. By the start of 2024, the U.S. venture debt deal value was up $3B YOY. And the VC industry has shifted dramatically, with some younger funds unable to raise again and others moving quickly forward with innovative funding products.
Uncertainty is a constant in the Innovation Economy. On this one-year marker of the SVB collapse, we're re-running an article that helps founders endure when market externalities are turbulent.
Original Post Date: March 17, 2023
During the chaos related to the failure of Silicon Valley Bank (SVB), we spent hours working with our founders. During a Town Hall on a Sunday night in the thick of the chaos, after providing updates and a guide for how founders could move their deposits when banks opened Monday morning, we fielded some questions. For the most part, those questions centered around a theme. What is the perspective on how the events with Silicon Valley Bank (SVB), SignatureNY, and the steps taken by the Federal Government will affect the broader-term investment market? Specifically:
The answers to these questions are about more than current events. They are about navigating markets, generally. Before we get into the larger context, answers to the questions.
For those playing the long game, which most entrepreneurs and private market investors do, the horizon looks positive for a few reasons. The hyper-innovation environment of 2021 has slowed, but that's not a bad thing. Tighter innovation markets (like the one we're currently in) tend to focus entrepreneurs on solving customers' problems. Those that do will be poised for a successful run. And despite unpredictability in the stock market, private capital is poised to continue to compound at a healthy rate, even if slower in the near term. All of that simply points to the fact that there are still businesses to be built and capital to be deployed. It also highlights the intelligence of taking a measured approach to deciding what to focus on this year — whether you're a founder putting resources into dialing in your solution or you're an investor who is seeking healthy returns.
Once we acknowledge that the story is not as dark as the daily clickbait would have us believe, we can begin to spot opportunities for long-term success.
Let's look back at past recessionary markets. Times of economic challenge tend to force businesses to focus less on securing as much capital as possible and more on dialing in the fundamentals that make their solution unique, differentiated, and defensible. The ones that come through are more likely to be battle-tested and resilient. After the recession in 2008, 9% of companies came through stronger than before.
Businesses like Netflix, Mailchimp, and Warby Parker used the recessionary environment to capture opportunities to thrive and grow. More than a decade later, these companies continue to lead because they built resilience and established a culture of innovation that keeps them ahead of market demands. The companies that grow during a contracting economic market prove the value of their solution and business model. Investors who are paying attention to these shifts can gain useful insight into where and how to put their money to work. They are able to provide the capital necessary for truly purposeful innovation, with the reward being a positive return on their investment.
Looking at recent history, we have just come through the second-best year ever for VC based on dollars deployed. Even though VC investment in 2022 was 37% lower than its record-setting 2021 levels, it was still a significantly higher investment year compared to any other time in history. Total VC investment hit $200B for the second year in a row in 2022 and more than $100B for the fifth year in a row. That volume and deal amount indicate that innovation and investment are both still happening at a significantly productive pace, even if it slows.
It's worth keeping in mind that this is a moment in time. What feels like a 'down' period is effectively "two minutes in a two-hour movie," as EY has aptly observed. In other words, for the investors who take the long game, the dip at the end of 2022 is a blip on the timeline. And let's remember that a basic tenet of investing is that the markets tend to reward those who stay invested in their portfolio as the economy, politics, healthcare, global issues, and other factors swirl.
If we believe that endurance can (and should) be how we approach investment and innovation throughout 2023, then we need to create a plan that we can stick with for the foreseeable future. As the COO and General Partner for one of the largest and most active VC firms in the Southeast, I have the opportunity to work with our investors as well as with our portfolio companies. Here's how we are advising them to operate. The counsel comes from more than 15 years of consistent top-quartile returns (even through a recession) and notable founder success stories.
As the now-famous Shawn Carolan quote goes, "startups don't starve; they drown." A recessionary environment or a pullback of VC funding might be your best asset in 2023. 'Easy' money can be a distraction. You raise once and then feel like you need to raise again and again. You go after one market, then feel like you should continue to go after as many markets as possible. Too late, many startups discover that they've tried to do too much and run out of cash without showing traction in any particular area. Position your business to operate for 18-24 months without needing additional capital. Then focus on building one unique solution for one market, tackling one problem, and showing success. You'll be less likely to drown in options and more likely to home in on your business fundamentals and differentiation.
For investors, a down market can be a great time to invest in the private market. Sure, a lot of the 'froth' has come out of the VC sector, pretty much decreasing valuations across the board. But that doesn't mean every current investment is good just because the price has come down. Look for businesses that are still gaining traction in such a difficult environment. That is where value is being created and is often a good place to invest.
In 2023, focus on partnering with a VC team that has a track record of being able to deploy capital in any economy, finding companies with a higher-than-average likelihood of success in any market. These are all telltale signs that the VC knows what they are doing and has a solid strategy, unimpacted by the greater economy. And if you can do that, you're likely to come out of this period having supported worthy founders and built wealth.
Over almost two decades of working in private capital investment and wealth-building, we have seen that opportunity can be found in any market, provided you take the right approach. Settle in with a view on the farther horizon for returns and the near term for disciplined actions that focus your time and resources. If you do, 2023 could position you for measurable success, whether you're building a business or building personal wealth.
This article is excerpted from a Forbes piece by Mark Flickinger that offers advice for navigating challenging markets over the long-term.
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