How does SVB's collapse affect Chinese startups?

Since the afternoon of March 12, topics related to the collapse of Silicon Valley Bank (SVB) such as “SVB bankruptcy spreads to many countries” and “SVB bankruptcy affects Chinese entrepreneurs” have been trending on China’s Weibo, with posts on these topics receiving hundreds of millions of views.

This is the second largest bank bankruptcy in US banking history (after the collapse of Washington Mutual in 2008).

While most Chinese tech companies and banks have avoided public comment on the matter, many venture capitalists and startups in the country are understandably confused, even panicked, as they see the bank as a bridge to reach investors on the other side of the globe.

“Lifebuoy” of many Chinese startups

In the late 1990s, venture capital was still a relatively new concept in China. While traditional domestic banks were indifferent to startups due to their fear of risk, SBV was one of the first foreign financial institutions to stand up and help these startups realize their dreams of going global.

Over time, SVB has become a popular choice for China-based startups looking to raise funds in USD, as well as some USD-based venture capital firms focused on the China market.

Having a bank account with SVB allows Chinese startups to tap into funding from US-based investors with the goal of going public in the US. Therefore, the collapse of SVB will more or less make it difficult for Chinese startups to raise capital from US investors.

World - How does SVB's collapse affect Chinese startups? — Silicon Valley Bank has a 50% stake in a joint venture with Shanghai Pudong Development Bank. Photo: globalcapital.com

However, that is only a potential impact in the future, and for now, many startups claim that they are less affected by this bankruptcy. According to experts, SVB is an ideal choice for startups in the early stages of raising capital, but when these startups reach a certain scale, they will tend to deposit money back to domestic banks for a higher capital turnover rate.

BeiGene, one of China’s largest cancer drug makers, said it had more than $175 million in uninsured deposits at SVB, accounting for about 3.9 percent of its cash, cash equivalents and short-term investments. The SVB case is unlikely to have much impact on the company’s operations.

Zai Lab, a pharmaceutical company, said its cash deposits at SVB were “insignificant” at around $23 million. The company holds most of its assets at JPMorgan Chase, Citigroup and Chinese banks, so SVB’s closure “will not impact” the company’s ability to meet its operating expenses or capital requirements, including payroll.

Several other companies also said the amount of cash they held at SVB was “minimal” or “insignificant.”

SVB's joint venture with Shanghai Pudong Development Bank in China also asserted that it operates independently and stably despite the collapse of its US parent company.

Difficulty finding alternatives

On March 12, U.S. banking regulators pledged to preserve SVB customer deposits in hopes of alleviating startup concerns. Still, many Chinese startups and venture capital funds are scrambling to find alternatives.

Some startups are turning to larger US banks, while others are looking to domestic lenders such as China Merchants Bank or Industrial and Commercial Bank of China.

QBIT, a banking startup based in Hangzhou, China, said it has received six times the usual number of account creation requests in the past three days, mostly from SVB customers.

CB International, a US bank that mainly serves small and medium-sized companies in Asia, said many Chinese startups and venture capital funds have contacted them to open accounts and deposit additional funds that they have withdrawn or plan to withdraw from SVB.

The above banks have offered account services similar to SVB's, but are unlikely to break the dominance of SVB, which has been operating here for more than two decades.

World - How does SVB's collapse affect Chinese startups? (Figure 2). — SVB has established relationships with local government officials in Shanghai to take on venture capital funds after traditional banks in the US turned them down. Photo: NY Post

Some Chinese venture capital funds say they are in a difficult position because SVB has certain advantages and is particularly friendly to early-stage startups.

“We are still looking for a bank where we can safely open an account. There are not many banks that are venture-friendly,” said an executive at a Chinese venture capital fund with deposits at SVB.

“Withdrawing money from SVB is the easiest option, but no other bank in the US offers the level of service that SVB has ever offered,” said an executive at a major Chinese investment bank with deposits at SVB.

“However, the market space left by SVB will be quickly filled by the next bank. That is an opportunity,” said Stephen Chen, co-founder of Shanghai-based startup Lead Digital .

Nguyen Tuyet (According to Reuters, CNN, SCMP)

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