Although depositors will get their money, it still seem clear that this past week’s run on Silicon Valley Bank will have a major near-term impact on the startup tech sector, including the construction tech and prop tech sectors. Beyond the impact on the startups that borrowed from the bank, one less understood aspect of the failure is that SVBs depositors included, not only many startups, but also many of the industry’s venture funds, and that has potentially further agitated limited partners in those funds who had already grown more conservative about their investments in the wake of last year’s decline in the tech sector and rising interest rates cycle. Additionally, SVB’s reach in the sector extends well beyond the San Francisco Bay Area, as SVB did business with tech companies and investors from Europe, the Middle East and Asia as well as the area around San Francisco. So, it will not only be tech companies and investors based in the Bay Area that will be affected, as these oversees investors consider how the bank’s failure relates to what we sometimes hear referred to as “silicon valley style” tech investing, which tends to be viewed as more free wheeling than in other parts of the world.
How ever all of this shakes out for the sector, it is certain that the failure of Silicon Valley Bank will be a major topic of conversation when we gather in San Francisco with 300 industry investors, technologists, and corporate strategists for our Venture West Conference next week. In the meantime, BuiltWorlds members interested in learning more about how SVB has been active in the sector may want to watch our interview with Faisal Mostamandy, senior vice president of SVB from last January’s preview Call to our Venture West Conference last year (or click on the Call Image).
One of the interesting aspects of SVB’s role in the construction tech sector, discussed on the call (at approximately minutes 21-31), has been the bank’s focus on providing lending tied to the hardware or capital expenditure aspects of many of the sector’s tech companies that were working in what the bank referred to as frontier tech, previously known as hardware tech. Frontier tech began at the bank with a focus on semiconductors a decade ago and evolved to allow the bank to provide more support to companies working on promising construction, robotics, AI, and even space-related ideas that involved hard assets. Traditionally, these types of startup efforts have been harder to fund in construction tech, even if there is broad consensus that real productivity gain in the sector will require hardware advances as well as software development.
By lending separately against a company’s hardware, the bank may have been able to look to hard assets to collateralize lending, and, in a sense, that “hardware as a service” line would also have been a more secure line of business for the bank, even while providing many promising new construction technology companies that leverage machinery a greater opportunity to grow. Whether this line of business will find a new home when the dust settles remains to be seen, and, unfortunately, that part of the construction tech sector will experience an added chill from the passing of SVB. We will have more on the fallout from SVB in our Weekly Venture Analyst Briefing.
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