The 5 SVB Critical Questions And Answers For Biotech

Six months ago, I wrote in Forbes how the Fed’s Inflation fight would harm Biotech. With the FDIC takeover of Silicon Valley Bank (SVB) using the receiver, Deposit Insurance National Bank of Santa Clara the judgment has proven to be correct. And what could happen next may be even more disruptive. From its high two years ago, the XBI biotech index has lost 50% of its value and far from being at a bottom, SVB’s demise poses an additional and un-quantifiable life-sciences systemic risk and there isn’t anything the FDIC will be able to do about it.

So, what are the 5 critical questions and answers about SVB and Biotech?

1. What was SVB and how did it operate? In many ways SVB was a one-stop banking-finance solution for its many Tech/Biotech clients. While it is common practice for banks today to bundle financial services for their clients, SVB was probably better at it than most given their personalized client relationships and their non-traditional client base (From start-ups to fast growing Life-Sciences concerns). These types of businesses are in constant need of financial assistance from venture debt, corporate revolving lines of credit covering receivables/day to day operations and letters of credit covering business leases/asset purchases.

The bank’s website was proud to claim that in 2022, 44% of US Venture Capital backed companies having done an IPO were SVB clients. This also meant that these same clients, both business and individuals were likely to carry multiple accounts with SVB making its abrupt end both profound and costly as the next bullet will explain.

2. How different was SVB from other banks? 88% of SVB’s deposits were above the $250,000 insurance maximums and that represented more than double the industry average. What this will mean for the Receiver bank can become very subjective, while no bank failure is straightforward, (e.g. – FDIC insured deposits will typically be released to depositors in a few days) it is unclear to what extent, accounts with deposits greater than $250,000 will recover any additional portion of funds on deposit. Add to this it is also possible to have deposits of more than $250,000 at SVB and still be fully insured if the deposits are maintained in different categories of legal ownership.

To use an example, under traditional FDIC Receiver management, if a depositor has only a single account with a balance of $255,000, he or she would be paid $250,000 through FDIC insurance and would receive a claim against $5,000 which is not insured. Under some circumstances, the depositor would be given a Receiver’s Certificate as proof of this claim and would receive payments as the assets of the bank are liquidated. The complication here arises from how long might it take for that last $5,000 to be distributed or imagine if the number is $5,000,000? And what if it’s a company and the number is $50,000,000?

3. How will we know the extent of damage to Biotech? Within the next few days, public companies will have to disclose their exposure in deposits, liabilities and loans with SVB according to the “SEC’s 8-K” major event reporting requirements. And some companies will want to remove all doubt by press releasing affirmation of no involvement. Yet, the rub becomes that we won’t know the complete damage to the biotech system for quite some time with different levels of reporting requirements by SVB’s non-public depositors/borrowers. While a private company could have been substantially harmed by the SVB failure, it will be up to its respective board to inform its investors, typically a VC firm, as to what degree they have been harmed. And then it becomes the VC investor’s decision as to when they inform their limited partners about the occurrence.

4. How did SVB become this important to Biotech? Over the last decade VC investments in Biotech have grown exponentially and SVB has been a critical part of that growth. Biotech start-ups and spinoffs have relied on a concentration of investors that has grown to a size never seen before. Simply put, SVB’s business was to provide venture debt and lending based on prior Series A or B investments from a specified universe of VCs. They used funding models based on both the VC and the amount of prior funding. Once SVB won the biotech company’s business it kept adding funding. Through every stage of growth SVB combined funding with a suite of personal services for the C-Suite executives the relationship grew and grew.

5. Finally, how did the collapse happen? According to the Amazon CEO, Andy Jassy, invention requires two things: One, the ability to try a lot of experiments, and two, not having to live with the collateral damage of failed experiments. Unfortunately, that will not be the case here.

Biotech has never been a sure investment. With an average failure rate of 90% for biotech startups, investors are asked to take certain risk and to put their faith and their money in ideas. Biotechs fail not so often from ill-conceived ideas but rather from inadequate access to funding.

When one has a physical asset that can be held or seen, one has a sense of stability and security. The value of a brick-and-mortar structure is easily quantifiable, but it is much harder to assign value to ideas. Innovative in biotechnology is all about the thinkers; their ideas are the currency. The value of biotech resides in their workforce and their ideas. If the lifeblood of biotech is in its people and their ideas, the fuel needed to sustain them is investment capital.

This provides painful irony to the SVB collapse. Its demise was not caused by its business with excessively risky startups, rather the problem was as simple as SVB’s asset strategy. By purchasing longer US treasuries at a time when the Fed was raising interest rates, it triggered sharp short-term devaluation of its investment portfolio. When forced to sell the same treasuries, SVB sustained immediate and problematic losses.

There is little the FDIC or the Fed can do to remedy this situation. And on the personal level, everyone, from the largest VC wondering how many cents on the dollar will be recouped to the bench lab technician worrying about their next paycheck, will suffer.

More broadly, the collateral damage will affect every one of us – What will be the loss in innovation? With no one to support the thinkers and their ideas we run a risk of entering into an era of Life-Sciences stagnation. It need not have happened this way…