One Week After Silicon Valley Bank's Collapse: Can the Biotech Venture Ecosystem Heal the Rift?

Silicon Valley Bank (SVB), which declared bankruptcy on March 10 local time, still displays the following content on its official website: “Ready to start your SVB journey? Together, we support the advancement of the life sciences and healthcare industries.”

The bank closely tied to the biotech sector has been bankrupt for a week. During this period, entrepreneurs who conducted business with SVB first endured a nightmarish weekend, as shock and panic spread throughout the community. With the U.S. Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) announcing joint actions to backstop depositor funds, people have awakened from the nightmare only to face a “world without SVB.”

“I’ve been busy opening accounts at other banks these days, and the experience doesn’t compare to SVB.” In group chats frequented by entrepreneurs, some are expressing their “nostalgia” for SVB. SVB was previously renowned for its high-quality service, with experienced and stable staff. Its relationship with startup clients and their dedicated contact persons was “like that of old friends,” making it virtually “responsive to every need” for entrepreneurs.

Entrepreneurs who had worked alongside SVB could not predict the bank’s ultimate fate, but they all knew well that it would be difficult for another bank to support venture capital with the same level of expertise and philosophy as SVB.

“There won’t be a second SVB,” they wrote.

It is easy to imagine that the collapse of SVB has brought not just a few days of emotional rollercoasters, but also longer-term impacts on confidence. “It will definitely affect the morale of investors and startups,” a Chinese biotech entrepreneur based in Boston told us. In the United States, venture capital firms often exhibit greater tolerance for frontier innovations in biotechnology and encourage early-stage biotech companies to engage in trial and error. This is closely related to the relatively ample supply of venture capital and the development of a financial system that is supportive of entrepreneurship.

“Goodbye, SVB.” Entrepreneurs have written these words. It is hard to say whether they are mourning the collapse of a bank or the fact that a leading biotech venture capital ecosystem has now been torn open with a rift.

If the founding of Genentech in 1976 is regarded as the dawn of the first wave of innovation in the U.S. biopharmaceutical industry, then SVB, established in 1982, has accompanied the biotech sector throughout its journey. The growth of SVB and the development of the industry are deeply intertwined, mutually nurturing each other.

SVB Has Devoted Itself to the Biotech Sector, and Biotech Firms Have Placed Their Trust in SVB:

• Among all venture capital-backed technology and biotech companies in the United States, nearly half had business relationships with SVB. According to publicly available information, SVB’s top ten depositors included Ginkgo, a benchmark company in the field of synthetic biology; iRhythm, a provider of wearable ECG devices and digital therapeutics; and Sangamo, a gene therapy company backed by multiple multinational corporations (MNCs).

• SVB Securities, the investment banking arm of SVB (formerly SVB Leerink), focuses on the biotech and technology sectors and boasts some of the industry’s top healthcare analysts.

• SVB has helped many biotech companies navigate difficult periods and contributed to their success at critical junctures. Moderna is one of the companies supported by SVB. SVB provided financing to Moderna through its distinctive lending approach and played a significant role in its IPO, helping connect Moderna with potential investors and participating in the IPO fundraising. Ultimately, Moderna raised $600 million, setting a record for the U.S. biotech sector. IPO underwriting is one of the ways SVB supports biotech companies. Data from the third quarter of 2022 also showed that SVB ranked first in the biotech sector with an underwriting volume of $243 million, surpassing Morgan Stanley.

“SVB’s mismanagement has adversely affected too many startups.” One entrepreneur stated bluntly that, given SVB’s significant influence within the venture capital ecosystem, it is widely believed in the industry that SVB’s bankruptcy could cut off funding sources for numerous early-stage biotech companies, as other banks are likely to raise their financing thresholds.

However, the impact is by no means limited to funding shortages.

“For early-stage startups, SVB offers a simple and user-friendly account opening process. Unlike other banks that focus primarily on promoting their own products, SVB places greater emphasis on serving entrepreneur clients like us, providing guidance on fundraising and cash flow management,” a Chinese biotech founder who established his company’s headquarters in California told VCBeat News, noting that SVB’s approach to supporting startups is nearly unique. “I can sense SVB employees’ deep insights into the biotech industry, and they frequently host industry events with high-quality themes and distinguished guests.”

SVB’s deep penetration and accumulated presence in the venture capital ecosystem also provide entrepreneurs with convenient networking channels. “They enjoy a strong reputation within the VC community and help entrepreneurs expand their professional networks. SVB often gains access to first-hand industry insights, and internal venture capital events at universities such as Stanford frequently invite SVB executives to share their perspectives.”

Innovative DNA synthesis company Twist Bioscience also benefited from the “biotech circle” built by SVB, becoming a client of SVB at its inception. Emily Leproust, co-founder and CEO of Twist, once remarked, “SVB is an accelerator… they understand the importance of relationships.”

For U.S. dollar-denominated biotech projects under domestic funds, the collapse of SVB has introduced another complication: more than half of companies with overseas VIE structures held their offshore accounts at SVB, forcing these companies to seek alternative banking solutions. In the aftermath of the initial shock, these companies are now considering opening accounts at multiple banks to diversify risk, which will impose additional operational burdens.

“SVB’s account opening review and process are very convenient, saving a lot of trouble compared to other banks,” an investor described to us.“SVB was like a bridge; now the bridge has collapsed.”

Will there be another bridge to connect the venture capital ecosystem?

The FDIC has initiated the auction process for SVB, with many large banks and investment institutions expressing interest in acquiring parts of SVB’s business. However, many biotech entrepreneurs remain pessimistic about this development,“SVB’s distinctive venture capital services will be difficult to maintain unless the successor is willing to make extraordinary efforts.”

For many biotech companies, the venture debt model pioneered by SVB has made a significant contribution to the industry’s development.

The operational logic of this business model is as follows: providing loans to early-stage startups and charging higher interest rates, while securing partial subscription rights or options through agreements; the parent company, SVB Financial Group, holds equity or options and exercises them to realize profits when the enterprise goes public or is acquired; for promising startups, SVB Financial Group engages its subsidiary, SVB Capital, to intervene via venture capital investment in order to achieve capital appreciation.

Traditional banks have long been reluctant to engage with biotech companies because the development trajectory of biotech innovations is even harder to predict than that of technology firms. In particular, biotech companies rely heavily on their scientific teams and the intellectual property they bring, which may not be clearly definable in the short term. Moreover, there are no established valuation standards for R&D pipelines that are unlikely to achieve commercialization in the near term.

However, SVB recognizes the valuable worth of intellectual property and future growth potential in the biotech sector. SVB not only pays for the intangible assets of biotech companies but also designs differentiated financial instruments and products for them, such as cash management solutions, financing plans, and credit facilities that minimize equity dilution.

This philosophy has not only influenced the U.S. biotech industry but also provided valuable insights for financial services targeting technology and biotech companies in China. Shanghai Pudong Development Bank Silicon Valley Bank, Beijing Zhongguancun Bank, and Hankou Bank’s technology finance division have all drawn extensively on SVB’s practical experience.

Nowadays, banks have become regular attendees at domestic biotech project promotion events. They proactively establish connections with investment institutions to source biotech projects. Many domestic commercial banks also support the biotech sector through integrated equity-debt financing models and have transformed their approach to evaluating biotech assets.

This has greatly promoted biopharmaceutical innovation in China.

Prior to its collapse, SVB operated 27 offices across the United States and three international branches, while maintaining an extensive business network in Asia, Europe, India, and Israel. This once highly efficient ecosystem drove the development of the biotech industry worldwide.

This is why biotech entrepreneurs around the world, even if they did not have deposits at SVB and were perhaps unaffected by this incident, have mostly expressed regret over SVB’s bankruptcy. Their deeper concern is whether the development of the entire innovation ecosystem will regress as a result. In the future, will the biotech sector need to make greater efforts to rebuild investor confidence in frontier innovation?

Gary Tan, President and CEO of Y Combinator, captured this deepest concern in his remarks on the SVB bankruptcy: “If we cannot find a solution, all small startups—including tomorrow’s Google and Facebook—will perish.”