SVB Financial Group, parent co. of Silicon Valley Bank is funding the future of innovation - The Average Joe

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    SVB Financial Group, parent co. of Silicon Valley Bank is funding the future of innovation

    victorlei

    November 2, 2021

    Silicon Valley Bank

    In tech’s early days, banks were reluctant to offer banking services to startups (i.e. loans/credit lines) — seeing them as big risks given 60-90% of startups fail.

    But Silicon Valley Bank (SVB), owned by SVB Financial Group, jumped at the opportunity — leading to a $40B business — fueled by the growth of innovation.

    Silicon Valley, the heart of innovation

    Founded in 1983, in the heart of innovation — a.k.a. Silicon Valley — SVB customers primarily included private sector companies (i.e. venture capital/private equity) with a focus on the tech and healthcare industry:

    • Expertise in evaluating startups — using metrics uncommon among other banks.
    • Strong reputation among early-stage founders — with SVB having a large network of investors, other founders and even potential customer referrals.

    According to SVB, 60% of venture-backed tech and healthcare IPO companies banked with SVB.

    • In some cases, SVB received stock warrants instead of interest from loans — which gave SVB the option to buy stock — giving it more upside.
    • Backed some of the biggest tech companies in the early days (i.e. SVB had a $115.8M stake in Coinbase during its IPO).

    A world where bankers fund startups better

    Big banks are trying to get closer to banking startups — but it’ll be difficult with SVB’s head start. Compared to the banking industry average, SVB has a much higher return on equity, growth rate and stock return.

    But SVB also takes on more risk compared to other banks — and doesn’t pay out dividends, which are common amongst bank stocks.

    In the past 2 years, startups raised record amounts of funding while going public at a rapid rate — leading to a 155% stock return for SVB in the past year. SVB has also been busy expanding into other areas:

    • Acquired Leerink in 2019 — a healthcare-focused investment bank to grow SVB’s investment banking practice.
    • Acquired Boston Private in 2021 — a wealth management firm to grow their personal banking practice.

    Investors: The next catalyst — rising interest rates

    The entire banking sector could get a boost in 2022 — with the Fed expected to raise interest rates. Learn: Why does rising interest rates benefit banks?

    • In 2018 and 2019 when the US lowered interest rates — SVB’s stock underperformed with just 3% return in the two years.
    • The US is expected to enter a period of rising interest rates in 2022 and SVB is forecasting earnings growth to double from 10% to 20%.

    The growth in startup funding isn’t showing signs of slowing — but any slowdown could negatively impact the company.

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