‘What a mess’: How biotech startups grappled with SVB’s collapse
13 Mar 2023
In less than 48 hours, the bank many young biotechnology companies relied on for years was gone.
On Friday, the Federal Deposit Insurance Corp. closed Silicon Valley Bank, culminating a stunning collapse that triggered alarms throughout the sector. SVB was a critical partner to biotechs, holding funds for emerging companies and their venture investors, as well as assisting with the initial public offerings they rely on as they mature. Now it is in federal receivership, with regulators holding an auction for bids by other banks to buy it.
The U.S. government took additional steps Sunday to ease fears of wider contagion, announcing it will protect the bank’s depositors as well as those of another institution, Signature Bank, which it closed Sunday. Depositors of both banks will have access to their money starting Monday.
Nonetheless, SVB’s failure adds new uncertainty to an industry that has been experiencing its biggest shakeout in years. Before the federal government’s intervention Sunday, the chief fear was that companies with funds frozen in SVB accounts would have trouble paying their employees or covering other near-term costs. Some venture investors were considering loaning their portfolio companies money to cover costs, sources told BioPharma Dive.
Dozens of biotechs — even those not doing business with SVB — issued hurried statements on Friday and over the weekend. Some scheduled, and then after Sunday’s announcement canceled, conference calls with investors.
“I literally had to send an email [on Thursday] to our major investors saying don’t worry about us,” recalled Wyatt McDonnell, the founder and CEO of startup Infinimmune, which isn’t affected by SVB’s closure.
Investors and executives interviewed by BioPharma Dive over the weekend were optimistic that, as long as SVB’s failure doesn’t spread, the bank’s collapse will only create short-term headaches, rather than long-term problems.
The Fed stepping in “is critical for the depositors there and elsewhere,” said Atlas Venture partner Jason Rhodes. “Based on what we know, [a] duration mismatch at SVB caused a liquidity crunch, but they were solvent. And the Fed learned a lot about how to manage these situations during the 2008 crisis.”
“I have a high degree of confidence in the institutions holding our money today, but we’ve all been taught an acute lesson about the need to diversify,” added Michael Gilman, the CEO of startup Arrakis Therapeutics.
A weekend scramble
SVB is closely intertwined with the biotech startup ecosystem, a role it earned by working with the type of risky, fledgling companies that traditional banks might be hesitant to do business with.
“For many years, we were told, ‘you’re a hot little startup, go bank with SVB,” said McDonnell, of Infinimmune.
According to its website, the bank had a relationship with more than half of the healthcare companies that raised a venture round since 2021 and three-quarters of the companies that went public. Before it was shuttered, SVB held $173 billion in deposits, of which more than 12% were from life sciences or healthcare companies. Venture firms like Polaris Partners and Bain Capital were among its clients, too.
The firm’s failure — the result of a bank run as companies rushed to pull their deposits — put much of that money in limbo. While the FDIC insures deposits of up to $250,000, more than 90% of SVB’s total deposits were not covered as of the end of last year, according to a regulatory filing. That temporarily stoked fears uninsured money would be inaccessible or potentially unrecoverable.
Genetic medicine developer Sangamo Therapeutics, for instance, had warned investors Friday that it had over $34 million deposited in SVB, and at the time didn’t know whether it would be able to regain those funds.
The ramifications were potentially significant for some. Companies with sizable deposits in SVB were concerned they might have trouble paying their employees. That’s “what has most people freaked out this week,” said Gilman, on Sunday.
“The biggest impact is going to be access to money for payroll, ongoing operations and research,” added Jeff Jonas, the former CEO of Sage Therapeutics and the head of a startup incubator called Abio-X, on Friday afternoon. “If they can’t get access to the cash that was deposited at SVB, that could be a very unfortunate situation for a lot of companies.”
Over the weekend, the FDIC transferred all insured and uninsured deposits to a new “bridge bank” and, in a Monday statement, said all depositors would have full access to their money and that checks would clear. Shareholders as well as certain debt holders will not be protected, the FDIC said.
Before the government’s action, most major venture capitalists were pointing their portfolio companies to big banks like J.P. Morgan and Citibank, or smaller “startup and founder-friendly” ones like Mercury and First Republic Bank, said McDonnell.
“I’m glad that that doesn’t really apply to us but I’m sure that there are many founders [trying to] figure up from down,” said McDonnell, who wrote a LinkedIn post offering to help fellow founders with advice or connections.
Sources predicted some companies might get loans from their investors to help steady operations. Rhodes, for instance, said Atlas “was ready to provide near-term funding to portfolio companies if it was needed today.”
Gilman said that, though Arrakis is unscathed, he and other executives spent much of Friday communicating with the board, employees and partners about the “status of our banking relationships and the safety of our funds.”
Many of Arrakis’ vendors that banked with SVB were sending new account information the company needed to verify, too, adding to the logistical headaches.
Gilman also pointed out that, because it’s “bonus season,” companies’ payroll obligations are currently higher than they normally are. Meanwhile, companies that tried to wire cash on Friday might not have known over the weekend if or when they’d see their money.
“What a mess,” he said.
Looking ahead
The government plan to back all deposits at SVB lowers the risk of immediate fallout from the bank’s closure. The move, which was paired with an offer of additional funding to other depository institutions, is meant to safeguard the U.S. banking system and prevent runs on other institutions.
“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” said President Joe Biden, in a statement Sunday night.
Sources who spoke with BioPharma Dive viewed SVB’s downfall as a unique event, provoked by missteps in SVB’s strategy and communication, rather than a harbinger of more widespread problems. “Hopefully people will be thoughtful in analyzing why this happened,” and whether “we need new regulations or rules, or if this is simply the unsatisfactory management behavior of a particular group that is not generalizable,” Jonas said.
Industry veterans were also confident SVB’s fall wouldn’t dramatically worsen the problems facing the biotech sector, which is facing as big a cash crunch as it has in years. Jonas noted how investors have already been “much more cautious” over the past year. “Is this going to make them more cautious? Possibly,” he added, but “I still believe good companies are going to get funded.”
Rhodes added that there is “sufficient banking capacity” without SVB. Several banks had reached out and offered support to the firm’s portfolio companies.
“There is tremendous commercial banking capacity in the U.S., and the whole banking community stepped forward to help companies open new accounts, etc. over the weekend so that they could continue operations this week,” he said.
Gwendolyn Wu contributed reporting
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