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‘High proportion’ of startups may fold by year’s end following Silicon Valley Bank failure, Morgan Stanley says


By Wallace Witkowski

Emergency measures may have alleviated immediate cash needs, but the rising cost of funding poses a longer-term challenge

Even with a lifeline provided by U.S. regulators to guarantee deposits beyond the usual limits after Silicon Valley Bank failed Friday, many startups may not make it to 2024 as funding becomes more difficult to secure, according to Morgan Stanley.

Although actions by the Federal Reserve and the Federal Deposit Insurance Corp. guaranteed the bank’s deposits above $250,000 over the weekend, “the medium-term cash burn issue of start-ups remains as pertinent as it was a week ago,” Morgan Stanley strategist Edward Stanley said in a note on Thursday.

Also read: Silicon Valley Bank’s failure is an extinction-level event for startups, says Y Combinator’s Garry Tan

With about 4 million U.S. employees at companies funded by venture capital, and about 12 million at private-equity-owned companies, the strategist calculated that unicorns — startups with a valuation of more than $1 billion — would need $300 billion, while startups with a valuation under $1 billion would need another $250 billion in 2023 “simply to stand still.”

Read:Inside the relationship with venture capitalists that did Silicon Valley Bank in

“Even with aggressive runway extension, a high proportion of start-ups could fold during [the second half of 2023] given the simple maths on cash burn rates,” Stanley said. “With cost of capital for banks on the rise, this is trickling down to VCs and start-ups. New credit lines costing <10% are becoming challenging to obtain, as is syndicated debt.”

Read: SVB fallout likely to affect some software sales in the short term, and how startups are financed long term

Venture-capital firms will also come under pressure to demonstrate actual cash returns, like distribution to paid-in capital versus paper returns, and that will become a “key bottleneck” to renewed capital market activity, Stanley said. He added that startups will likely have to raise money through secondary transactions “at deep discounts to prior formal rounds.”

California regulators closed Silicon Valley Bank Friday after parent company SVB Financial Group (SIVB), once an S&P 500 component, collapsed as the bank’s Treasurys exposure was too great to withstand aggressive Fed rate hikes.

That left many startups with money deposited at the bank scrambling over the weekend to figure out how they would make their next payroll.

-Wallace Witkowski

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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03-18-23 1514ET

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