The Startup and Venture Capital Barometer Plunges: Silicon Valley Bank Today vs. Dotcom Bust


The startup and venture capital bubble is tied to a booming stock market, but stocks are crashing, throttling the flow of money.

By Wolf Richter for WOLF STREET.

Silicon Valley Bank, as the holding company of SVB Financial Group, is the 13th largest bank in the United States, with $214 billion in assets. He is heavily involved in the ecosystem of startups, venture capital firms and private equity firms in Silicon Valley and other cities in the United States and around the world.

He released results Thursday evening, which included a complaint about the slowing venture capital and startup ecosystem and stock market “volatility” — “volatility” meaning the Nasdaq Composite is down 27% until What’s Strangling Money-Flow in the Startup Ecosystem.

On Friday, his actions [SIVB] plunged 17.1% and is now down 53% from the high in early November 2021, which was around the time the Nasdaq peaked. Silicon Valley Bank also went through the Dotcom bust: after a huge surge, its shares crashed 77%, much like the Nasdaq. So here we are today, with its shares, after a huge surge, down 53% so far (data via Y-Charts).

“The IPO window remained closed.”

In the Letter from the CEO To shareholders, the bank lamented that the “IPO window remained closed” and that “companies at all investment stages faced challenges accessing liquidity, total capital investment- risk having decreased by 24% from one quarter to another”.

He said reduced fundraising by his start-up clients, “coupled with increased burn rates – companies with already accelerated burn rates taking proactive steps to reduce future spending – have put pressure on the balance sheet growth in the second quarter”.

He warned that “the increase in unqualified imputations and new NPLs [non-performing loans] may indicate potential emerging pressure from market volatility.

This “market volatility” signifies the decline of the stock market, because in this ecosystem everything depends on a booming stock market that gives early investors, such as venture capitalists and private equity firms, a chance to go out and sell their shares to the public at huge prices. , and it gives startups a chance to raise a lot of money and pay off all their obligations. But now that IPO window is closed.

And the letter said: “We have adjusted our outlook for 2022 to reflect our expectations that have tested public equity markets and the decline in venture capital deployment will continue for the remainder of 2022, which which will put pressure on the growth of our balance sheet.”

On the earnings call, Chief Financial Officer Dan Beck said he expects another 20% sequential decline in the third and fourth quarters of private venture capital investment.

The letter also noted that venture capital and private equity firms are sitting on “record levels of dry powder (8 times higher than 2000 levels) to put to work, and we believe they will.” as valuations stabilize.”

In the second quarter, there were only 21 IPOs, and most of them were tiny, according to Renaissance Capital, compared to the second quarter of last year, when there were 118 IPOs:

Then there are incomes that suddenly drop.

Net profit in the second quarter fell 34% year-over-year to $333 million, the bank reported. Net earnings per share fell 38% year over year to $5.60 per share. That was well below analysts’ expectations, polled by FactSet, of $7.82 per share.

Parallels to the Dotcom Bust.

Silicon Valley Bank survived the dotcom meltdown that ravaged the Nasdaq, Silicon Valley, San Francisco and investors around the world. The Nasdaq plunged 78% from a high of 5,046 in March 2000 to a low of 1,114 in October 2002. And with considerable help from the Fed in money printing and an interest rate crackdown that inflated all asset prices, the Nasdaq finally recovered 5,000 in 2015. It took 15 years.

During the dot-com bubble, shares of Silicon Valley Bank soared, growing fourfold, from early 1999 to September 2000, but the shares then fell 77%, giving up nearly all of the gains and bringing them back at 1998 levels.

It’s not on this chart, but I’ll mention it for your amusement: it took the SIVB until 2013 and a lot of money printing and interest rate suppression by the Fed to get back to its 2000 high for more than a brief moment:

In this crazy time, the SIVB has increased almost fourfold, from $190 to $750, between the end of 2019 and the November 2021 peak. And so far, stocks have given back about two-thirds of that gain. .

The SIVB is a barometer of what is happening in the startup ecosystem: funds from the stock market have all but stopped flowing into the ecosystem, and early investors are struggling to unload their shares at exorbitant prices, which changes everything.

There is now a new caution among these investors. Valuations are collapsing. Suddenly, startups are being urged to reduce their cash burn rate because they won’t be able to raise new cash to burn if the outlook for positive cash flow is somewhere in eternity.

There’s now talk among startup CEOs about the length of their “runway,” that is, how long they have before they run out of money.

Startups of all kinds, from crypto to biotech, are laying off staff left and right in order to cut expenses and lengthen their runway. And they cut ad spend because it’s the easiest thing to do.

And everything shifts into low gear, and when these companies run out of money, they disappear, and their employees go elsewhere to find jobs. At this point, there’s still a huge demand for tech workers, and it looks like they’re being taken pretty quickly for now. But that’s just the beginning – the first two quarters of the biggest startup bubble and stock market bubble of all time.

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