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Impacts on Local Ecosystems in the Wake of SVB

Three ways the SVB and banking fallout will impact local business ecosystems

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The SVB collapse will have significant impacts on the tech ecosystem, both nationally and locally. This means local ecosystem builders must be alert to the impacts.

Even though the actions of regulators were able to stop an immediate banking crisis, there will still be significant fallout from the collapse of SVB and other regional banks (read a summary of what happened here).

How will this impact local entrepreneurial ecosystems?

There are three areas that ecosystem builders need to keep their eyes on: 

1. Damage to Regional Banks = Reduced Access to Banking Services

Two established banks have already fallen - SVB, and Signature Bank, who fell to a similar run & whose depositors were also covered through the Federal Reserve's actions. Whenever a bank fails, this means major headaches & distractions for customers, the loss of jobs, and the introduction of more panic over the banking system.

As of Tuesday, it looks as if the actions of the FDIC were able to stave off a full banking crisis. However, that does not mean regional banks are out of the woods.  As news of these banking challenges continue to spread, consumers and businesses could lose faith in regional banks, pulling out their capital and transferring it to larger institutions. Sadly, this is already happening. As of Tuesday night, JP Morgan Chase, Citigroup, and Bank of America all saw a skyrocketing of deposits, from customers transferring their assets out of smaller institutions. Even if this doesn't lead to more bank failures, it still spells trouble for local ecosystems.

Regional & local banks play a major role in local business ecosystems. Local banks have long been the primary backers of local small businesses, as they can form relationships with business owners, which increases confidence in lending to them. For the same reason, many startups bank locally, since the large national banks are not setup for early-stage companies with unstable and uncertain financials, and smaller institutions are better set up to be flexible to their needs.

As more regional and local banks loose deposits, they will be forced to close branches or reduce capacity. This means more early-stage companies will have to bank with either larger institutions that are not structured to serve them (for example, by requiring personal collateral on any business credit lines), or neobanks (such as Mercury, Ramp, or Brex), which are often not an option for small businesses, only tech companies.

This means that it will be harder for local businesses - traditional and growth companies alike - to form the banking relationships they need to access capital, creating even more barriers to new company formation in many ecosystems

2. Tech Market Instability = Harder Time Fundraising

The broader tech industry was in flux before this crisis; hangovers from the 2020-2021 boom, layoffs from large companies, the reduction in demand of tech products, and general conservatism given concerns of a recession have already caused significant uncertainty and contraction in the tech & venture capital ecosystems. The SVB crisis has worsened these conditions.

Many investors will not be making new investments for the next week or so, instead focusing on re-stabilizng their own finances (many VCs banked with SVB as well), and get their portfolio companies back up and running. Even after this period, it's likely that investors will reduce their new investment volume until there is more certainty in the market - in times like this, investors tend to prioritize their existing portfolio companies over new investments, and there is greater incentive to wait and see if a company's valuation goes down (making investing a better deal).

This means that tech companies will have a harder time fundraising, and when they do, valuations will be depressed. This will impact all local ecosystems, even those with very robust capital networks, as companies either struggle to raise their first rounds of capital to grow, or they have a hard time raising their next round to stay alive.

Local ecosystem builders should prepare for the reality that fewer local startups will be able to raise venture capital, and for those that do, the process will take much longer

3. Reduction of Jobs Created by Startups

Before this crisis, startups were already becoming more conservative with their spending, mostly through either reducing hiring or laying employees off. This is related to the slowdown in the VC market - the primary advice for startups is to reduce burn as much as possible, so that you can survive on less cash and delay a fundraise until the markets get better (or, get to profitability over the same period).

Companies under 5 years old are some of the biggest contributors to new job growth in many local ecosystems. As more companies slow hiring, lay off workers, shut down, or never get the capital to launch or scale in the first place, there will be a reduction in the number of jobs available in the local tech ecosystem. This means that ecosystems will have more people looking for work, and they may consider either moving to another ecosystem, or getting a remote job, if they cannot find employment in the local tech ecosystem.

Of course, any rise in local unemployment also spells trouble for local businesses, as laid-off workers (and even those who fear for the stability of their job, but are not laid off) reduce their consumer spending. In this way, a recession in the tech economy can spell trouble for Main Street in ecosystems where there is a high concentration of tech companies who need to reduce their workforce.

Ecosystem Builders should be prepared for an overall reduction in the number of tech jobs. If tech unemployment rises significantly in the ecosystem, small businesses will be affected as consumer spending tightens.

Depending on how this week progresses, there may be more impacts that we aren't anticipating, and the degree to which any given ecosystem is impacted will fluctuate based on many factors.

Regardless of how impacted your local ecosystem is, the SVB moment still provides a major opportunity for ecosystem builders to start conversations, form partnerships, and lay the foundation for stronger local ecosystems. We dive into that in our next article.

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