- Banks honoring existing commitments, outlook for future financing murkier
- Less leniency from banks may drive forced M&A
- VCs, family offices, other non-bank lenders could play larger role
With the demise of a significant pool of capital in the wake of two bank failures, many tech companies are recalculating runways and reworking operating plans – and likely some will end up with few options but to seek an acquirer, an investor and several advisors said.
Securing venture debt was already difficult for all but the best issuers or borrowers. The failures this month of Silicon Valley Bank (SVB) and Signature Bank exacerbate that difficult environment and threaten the regional banking system at large. The collapse of SVB, the go-to bank for venture capital-backed tech start-ups, was set off by a scramble of companies seeking to move deposits from smaller banks to large, money center institutions.
Protect Animals with Satellites, a provider of pet safety and training technology that does business as Halo, has a significant amount of money in SVB, though its operating accounts are kept elsewhere, co-founder and Managing Partner Ken Ehrman said. The Plano, Texas-based firm is working with Jefferies and said it is being advised to not pass up capital.
“They’re saying, if you have anyone willing to give you money, take it because it’s only going to get worse,” Ehrman said.
Those companies with the wherewithal to secure bank debt in this environment will likely be those with lower debt-to-EBITDA levels, and even existing customers could find banks less willing to restructure loans or renegotiate covenants, according to two bankers.
“The banks may have less patience all of a sudden and be tightening the screws on companies that are long-standing clients, whereas in the past, maybe they’d be more lenient or flexible,” said Jonathan Zucker, the head of capital advisory at Intrepid Investment Bankers, an investment firm serving the middle market. “That’s going to drive maybe some forced refinancing or forced M&A activity.”
A growing number of undercapitalized companies are already hitting the market looking to sell or merge, said Mark Volchek, the founding partner at Ft. Lauderdale, Florida-based Las Olas Venture Capital. Some will find ways to grow without new capital, “and many will fail,” he said.
More cash from the venture and investment communities will be required to support these companies, according to Jeff Grabow, US venture capital leader at EY. Less bank participation means that non-bank lenders, like family offices, are likely to step in and play a larger role, three advisors said.
“Nobody expected we would be here three weeks ago, let alone a year ago,” Grabow said. Effects of rapid business adjustments will “reverberate up and down the tech landscape,” from startups to public companies, he added.
It is too early to gauge the full impact of a diminished banking infrastructure that for decades has supported companies from their first capital raise through to their IPOs and beyond. There remains a great deal of dry powder on the sidelines and, thus far, financial institutions have been honoring existing situations and meeting deadlines, three advisors said.
While the Biden administration stepped in to insure all SVB’s deposits, the concern remains that there may be other bank runs.
The startup-focused banks were an important part of the technology innovation ecosystem, but the sudden exodus of deposits will be difficult for regional financial institutions to reverse, Volchek said. Deposits are generally “pretty sticky,” and companies are unlikely to move that money back unless they get credit from a smaller bank under an agreement that requires the deposits be moved, he explained.
The suddenness of SVB’s collapse also introduced a new worry: treasury management. “People were freaking out” for about 48 hours, during which many companies didn’t know what would happen to their money, Zucker recalled.
In addition to moving money outright to large banks, many companies will now make a conscious effort to diversify deposits, making use of brokerage accounts, sweep accounts and otherwise splitting money among multiple banks, several of the advisors said.
Despite challenges with financing very large transactions, private equity could step into the fray, though there are reports that some firms bidding on deals are lowering their offers, said Steven Dresner, the founder and president of Dresner Partners, a middle market investment bank.
Raising capital for individual companies is much harder, but there remains cautious optimism that swift government action will stave off the worst effects of the current banking sector instability.
“It's going to take some time for everyone to get reassured,” Dresner said. “I don't want to predict doom either, because we're very busy…and people haven’t retracted their offers.”
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