European tech sector appears unfazed by SVB collapse

Private equity and venture practitioners still warn of lower fundraising volumes for venture capital in 2023.

After a tense week and a half in which US and UK regulators stepped in to save start-ups from big losses following the collapse of Silicon Valley Bank, it appears that the fallout is not putting a big dent on Europe’s tech ecosystem.

Vincenzo Narciso, a partner at Europe-focused Earlybird Venture Capital, said that, across more than 50 portfolio companies, only three had some exposure to Silicon Valley Bank and all three have received their deposits back. “We always advise our companies not to have more than 30-35 percent of cash at any given point with one bank. So, the SVB situation has not been that bad for us.”

Narciso noted that there isn’t much change in Europe’s tech sector with the demise of SVB. “The impact in Europe seems to be minimal, compared to the impact on some US players. Last week we heard that some of the big guys in the US had just issued capital calls, which would have put some LP money at risk sitting in an SVB account.

“Those kinds of situations could impact the capacity of some US firms to be active in Europe in the short to medium term, which will create even more of an opportunity for pure European players like us.”

HgCapital Trust reassured shareholders last week in a statement that “there is little to no impact on HGT from the collapse of Silicon Valley Bank”, noting that “neither Hg, nor any of its managed funds, have related loan or borrowing exposure with SVB”. While a small number of the underlying portfolio companies have limited deposits with SVB, none have any outstanding borrowings, it noted.

David Dowling, a counsel at Ropes & Gray, said firms and businesses are continuing as they were, adding that the collapse of SVB is not a material threat to the sector. That said, Dowling acknowledged a heightened sense of caution: “It has made some companies conclude that they probably need to spread their banking across multiple institutions. And what we might see is an increased nervousness around smaller, regional or so-called niche banks.

“A large bank like HSBC moving into this space will be interesting for the European market, where we have been behind the US in VC generally and SVB had a lot of that business. That means that as investors and start-ups diversify their banking there will probably be a lot more early-stage businesses up for grabs.”

SVB had a major presence in the tech communities of Europe and Israel. Its UK subsidiary, which was sold to HSBC for £1, was a lender to London’s start-up scene. The Bank of England said the deal, which protected £6.7 billion in deposits, would “stabilise” SVB UK. It would also “minimise disruption to the UK technology sector and support confidence in the financial system”, the central bank said in a statement. Germany’s regulator BaFin last week issued a ban on disposals and payments on the bank’s German branch, stressing there was no “threat to financial stability”. SVB Germany on Monday received authorisation from BaFin to operate its lending business.

Consequences and opportunities

This means that there is now a bigger role for private equity and private credit firms to provide capital to medium-sized companies, according to Michel Degosciu, managing partner of listed alternatives research firm and adviser LPX AG. “This shouldn’t be the role of just regional banks or SVB.”

Degosciu said he expects capital inflows for VC to decrease globally this year. “We have seen this start in 2021 – there was already a rotation from growth and tech to more traditional sectors like industrials. We cannot expect that much money to flow into VC in the future as in previous years. More money will flow into buyouts, especially in sectors and companies which have improved business models.”

Venture capital funds globally raised nearly $166 billion in 2022, up from $131 billion in the previous year, and accounted for nearly half of total funds closed in 2022, according to PEI data.

Earlybird’s Narciso noted that 2023 will be a transition year with more repricing in the market, particularly for mid- and late-stage investments. “We think 2024 will start to be an interesting year to exit some of the companies we’ve backed over the last two or three years. This is underscored by the fact that we don’t see innovation across industries slowing down, but rather accelerating even during a period of market dislocation.

He added that his firm is seeing a lot more interest from US endowments and top-tier institutional investors. “A lot more investors are starting to see not just the number of unicorns in Europe but also the more attractive capital efficiency of companies in the region. You now finally have the whole value chain – from early stage to late stage, as well as banks and law firms. It’s a much more well-functioning venture ecosystem in Europe.”