What SVB’s Collapse Could Mean for Behavioral Health Companies

Silicon Valley Bank’s (SVB) collapse and subsequent takeover by federal regulators could have significant implications for the behavioral health startup ecosystem.

On Friday, the major California-based bank that catered to startups and tech investors crumbled after failing to raise capital. Since then, Signature Bank and crypto bank Silvergate have also collapsed.

SVB’s demise could have long-term impacts on behavioral health companies with debt or equity relationships with the bank, with those companies possibly finding themselves with a new equity stakeholder or searching for a new credit line. On the macro level, SVB’s failure signals to startups that the market is changing – and the availability of capital and debt funding is tightening.

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“It’s just yet another kind of signal to health tech founders that the world is different in 2023 than it was in 2022, and it was in 2021,” Michael Yang, managing partner at venture capital firm OMERS, told Behavioral Health Business. “Every dollar you have, cherish it like it’s your last, and be super efficient with your business. So it’s just reaffirming that we’re in that world, and we’re not in the world where you can raise lots of money, splash the cash around, and try a lot of different things that you weren’t quite sure on.”

Historically, SVB has acted as a venture capitalist participating in funding rounds for behavioral health companies Circulo Health, a intellectual and developmental disabilities provider, and Concert Health, a virtual behavioral startup focused on collaborative care. SVB has also served as a lender to behavioral health companies and provided venture debt to pediatric behavioral health company Brightline, autism provider Cortica and telehealth service HelloHero

“SVB, beyond just being a commercial bank that took deposits from these venture-backed behavioral health companies, sometimes was a venture capitalist themselves. They invested in, purchased equity in some of the startups,” Yang said. “Then they were obviously a lender for some of these startups. And then oftentimes, there is also a limited partner investing in health tech funds, who may have also invested in the same behavioral health startups.”

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The fall of SVB could be particularly problematic for companies with venture debt arrangements with the bank.

“You’re a founder of this great telehealth business, and you also got SVB to sign up to give you $3 million of venture debt should you need it later this year. It’s pretty much safe to assume that $3 million in debt is no longer accessible,” Yang said. “A new owner of SVB and those assets would have to decide if they would want to honor it. … If you had counted on that to get you through the end of 2023 or get you into 2024, you now need to go find new sources of venture debt or new source of the capital to that.”

Another drawback to finding a new lender is that debt will likely be more expensive than it was with SVB due to rising interest rates. Additionally, lenders have taken a much more conservative approach in early 2023, too, only financing rock-solid transactions.

That notion was among the topics discussed earlier in March in Chicago at the McGuire Woods Healthcare Private Equity and Finance Conference.

“Before we would sort of kick the tires and maybe circle the car a few times,” Elizabeth Vosnos, managing director of health care debt capital markets at Fifth Third Bank, said at the event. “Now, we’re dismantling it and taking a toothbrush to it. I do think that there’s very much a renewed focus on credit quality, as well … the risk-reward proposition.”

Fifth Third Bank, the principal subsidiary of Fifth Third Bancorp, is one of the largest banks in the Midwest. Fifth Third has even been impacted by SVB’s fall, with its stock plummeting in early trading Monday.

Broader implications

It isn’t just companies with a debt relationship with SVB that could be impacted. SVB also has participated in several startup funding rounds through its fund SVB Capital, which is also seeking a buyer.

If SVB Capital is sold to another bank or financial institution, the new owner will then have that equity. This new owner may or may not choose to participate in future financing rounds. Still, Yang noted that typically, SVB did not have a significant position in any given startup.

“It wasn’t like they were a 20% owner, a 50% owner, a 10% owner. Maybe they were a small, single-percentage-point owner of a startup,” he said. “So if they didn’t choose to continue to write more checks, other investors theoretically could help absorb and pick up the slack on that front.”

As for companies with a deposit relationship with SVB, Yang said this caused temporary destruction but not necessarily long-term issues. On Monday, the federal government announced it would back SVB deposits beyond the federally insured maximum of $250,000.

“The government has set a precedent with SVB and Signature, [saying] we’re going to backstop and guarantee your deposits. You’re good on that front,” he said. “I think the best course of action that most startups are taking right now is they’re opening up multiple commercial bank accounts.”

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