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Med-Tech Startups Survive SVB Collapse but Face New Concerns

by Glenn S. Demby | Mar 30, 2023 | Capital-lir, Essential, Laboratory Industry Report

While only time will tell how bad the ultimate damage turns out to be, it appears for now at least that the industry has dodged a bullet.

illustration of piggy bank floating in water surrounded by paper money. Economic meltdown concept. Stock image. — iStock, mphillips007

After the heady days of 2021 when investment capital was being raised at historic rates, biotech and life science startups have been struggling with inflation, falling valuations, and other harsh economic realities.¹ And on March 10, it looked like the sector was about to implode when word came that its financial backbone, Silicon Valley Bank (SVB), was on the verge of total collapse. While only time will tell how bad the ultimate damage turns out to be, it appears for now at least that the industry has dodged a bullet.

The SVB Collapse

SVB was a med-tech venture capitalist piggy bank. Nearly half of all US venture-backed technology and life science companies kept their money there, making SVB the 16^th largest bank in the country with $342 billion in client funds and $74 billion in loans, according to the company.² Its collapse was as unexpected as it was rapid. It began on Wednesday, March 8, when SVB announced that it was launching a public offering to raise up to $2.25 billion to make up for recent investment and credit losses.³ What was designed to calm the market had the exact opposite effect, triggering a run on the bank. By Friday, SVB’s stock shares were down 80 percent and the bank’s market value dropped by 60 percent, according to an inside source contacted by G2 Intelligence. California state government regulators shut down the bank that morning with plans to reopen the next Monday, March 13.⁴

But the reopening never happened. What had become the second largest bank collapse in US history (behind only the failure of Washington Mutual in 2008) sparked panic across the digital health startup sector with companies desperately trying to withdraw their money. The US government had to step in to restore order by having the Federal Deposit Insurance Corp. (FDIC) reassure FDIC-insured depositors that by Monday morning they’d have access to their funds from a bridge bank, the Deposit Insurance National Bank of Santa Clara. The FDIC also lifted the $250,000 per account deposit insurance limit for SVB customers who might otherwise have been completely wiped out.⁴

However, federal protection covered only SVB depositors, not its investors or creditors. “They knowingly took a risk,” President Biden told reporters on March 13. “And when the risk didn’t pay off, investors lose their money. That’s how capitalism works,” he added.⁵

The Immediate Impact of the SVB Collapse

While cash is the lifeline of any business, it’s especially vital for med-tech, life science, and other startups to cover the operating losses those firms typically incur, especially during the venture’s early years. Thanks to federal intervention, SVB depositors were able to keep the cash reserves they need to survive.

In addition, it appears that the scope of exposure was narrower than initially feared, at least among established firms in the sector. That’s the finding of a report from medical technology industry analyst MedTech Dive, based on bank analyst customer surveys and U.S. Securities and Exchange Commission (SEC) filings. “Overall, our covered companies appear to have minimal exposure, if at all to SVB,” wrote a New York-based analyst from RBC Capital Markets in the report.⁶

An analyst from William Blair Equity Research in Chicago came to the same conclusion, telling MedTech Dive that “we do not view [the SVB situation] as a major issue” while adding that different banks were already approaching customers, offering new lines of credit.

Of course, firms that invested in SVB securities or lent the bank money are uninsured and will have to eat their losses. Among the notable firms that the MedTech Dive report cites as indicating via SEC filings of having such exposure are iRhythm Technologies, AtriCure, ViewRay, Humacyte, Lensar, Vericel, and Treace Medical Concepts.

The Long-Term Impact of the SVB Collapse

While it seems not to have caused as much immediate financial devastation as it might have, the SVB collapse will also have long-term ripple effects. Companies that were lucky enough to get out of Dodge might still take a hit if any of their investors or customers were among those who did lose substantial sums of money as a result of SVB. Startups will wonder whether those firms directly affected by SVB will still be able to consume their products and finance their operations.

Perhaps the most lasting legacy of SVB will be its psychological effects and undermining of confidence for the future. Having narrowly avoided disaster, med-tech and life science startups are now left with legitimate concerns and doubts about the sustainability of the entire venture capital and banking system. The big question on everybody’s mind: Was SVB an aberration or an early symptom of wider dysfunctions that will become apparent only later?