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

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

    Victor Lei — Head of Research

    November 2, 2021

    Silicon Valley Bank

    November 2, 2021

    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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