Some venture capitalists say it’s business as usual for their investment plans in the aftermath of Silicon Valley Bank’s downfall.
But analysts with PitchBook wrote in a report this week that SVB’s collapse “could not have come at a worse time for the VC market.”
The chaos surrounding Silicon Valley Bank and larger upheaval in the banking sector coincides with an already sluggish venture capital investing landscape, following record funding levels in 2021.
Higher interest rates and the broader tech downturn were already slowing investment activity. Pacific Northwest startup deal value was down nearly 80% in the first two months of this year, according to Startup’s recent fundings list.
Nationally, venture-backed companies raised $29.3 billion across 1,245 deals through February, according to preliminary VC data provided by Ernst & Young. That’s down from 2,383 deals and nearly $56 billion during the same two-month period last year.
“There would never have been a good time for the bank to fall, but this is another major pressure on the market that will accelerate the pricing correction in VC,” PitchBook senior analyst Kyle Stanford wrote in an email newsletter Saturday.
Andy Liu, partner at Unlock Venture Partners, predicts that new deals will slow in the near and mid-term, while the bar for entrepreneurs will be raised.
“The impact psychologically for investors will be to invest in startups likely to have the least amount of future financing risk, which includes more syndicated deals resulting in deals that take much longer to put together,” he said.
Unprofitable startups will have a harder time raising venture debt from banks, Liu said. SVB was a top provider of venture debt, a specialized loan typically repaid using future venture capital, helping startups fund their growth and bridge the gap between investment rounds.
Other investors say it’s business as usual.
“This was a moment in time that froze funds,” said Hope Cochran, managing director at Madrona Venture Group. “It certainly doesn’t change our strategic direction for what we’re here to do. There is no reason why we would slow down investing now.”
Tola Capital Managing Director Sheila Gulati said there will be long-term impacts on startups, such as increased attention on cash management, and changes to venture debt and revenue-based financing.
But she does not expect a “funding freeze,” particularly with the continued rush of new innovation around artificial intelligence technology such as the launch of GPT-4 this week.
“This AI tailwind will far outweigh the banking crisis headwind from a venture funding perspective, and we couldn’t be more excited to back great companies at this time,” she said.
Speaking on the Startup Podcast this week, Kirby Winfield, founding general partner of Seattle VC firm Ascend, agreed there is not “some sort of deep freeze.”
Winfield said venture capitalists have a fiduciary duty to their limited partners to discover and invest in the “best founders in the market.” He committed to a deal last week, in the middle of the SVB fiasco.
“There’s no stopping deployment,” Winfield said.
Legendary venture capitalist Bill Gurley, who backed Seattle tech giants Zillow and Rover, told Bloomberg he expects prolonged pain in the tech sector.
But the turmoil may actually create opportunities for investment.
“A lot of people aren’t investing,” said Jason Stoffer, partner at Maveron, “which always makes it a good time to invest.”