The Federal Deposit Insurance Corporation’s decision to take over Silicon Valley Bank on Friday is likely to leave many digital health companies scrambling to pay employees and suppliers.
SVB, the nation’s16th largest bank and headquartered in Santa Clara, California, was a big bank for tech companies, startups and venture capital firms. The bank said on its website that it had $78.8 billion in healthcare deposits and investments as of December.
Experts say SVB’s failure is another sign the digital health venture funding market is long past its peak. Funding has slowed down considerably from the highs of 2021. While the total for 2022 was the second-best year since Digital Health Business & Technology started tracking the data in 2010, the fourth quarter was the lowest quarterly funding total in five years. Most experts say 2023 will be worse.
“We had a prolonged period of very low interest rates, essentially free money, and we’re unlikely to return to that type of environment,” said Matt Wolf, a director and senior healthcare analyst at consulting firm RSM. “This is the environment that digital health operators need to be accustomed to.”
SVB’s collapse and the quick takeover by the FDIC followed a run by depositors on the bank Thursday. Notably, the FDIC did not wait until the close of business to seize the bank, as is typical in an orderly wind down of a financial institution.
The FDIC created Deposit Insurance National Bank of Santa Clara and immediately transferred all insured deposits there at the time of the shutdown. The regulator said all insured depositors will have full access to their insured deposits no later than Monday morning, Uninsured depositors will receive an advance dividend and a receivership dividend, and potentially additional dividend payments as bank assets are sold. Customers with accounts in excess of $250,000 were told to contact the FDIC.
The bank had $209 billion in total assets at the time of failure, the FDIC said. A report from S&P Market Intelligence said that 97.3% of SVB’s deposits were uninsured.
The bank of the digital health economy
SVB was the bank for many digital health startups and venture capital firms. The bank was used by 76% of venture capital-back initial public offerings in healthcare since 2020, according to data cited on its website.
Its digital health clients included home healthcare provider DispatchHealth, which got funding from SVB for its $330 million round in November; primary care company Oak Street Health, which got a $300 million credit facility from SVB (which worked with Hercules Capital on the credit facility) in November; and physician enablement company Privia Health. SVB said it had $100 million in financial commitments to Privia, according to the bank’s website.
DispatchHealth said its business will continue to operate normally and directed additional questions to the FDIC. Privia and Oak Street Health did not respond to requests for comment.
In the hours before the FDIC moved in, digital health clients with uninsured accounts were attempting to remove deposits from SVB while other banks were calling to guarantee deposits, said one financial analyst who requested anonymity to comment.
Dr. Michelle Longmire, CEO of clinical trial tech company Medable, said on Twitter she was “sad but also deeply relieved to report, I successfully navigated a run on a bank.”
The rapid failure of SVB forced companies to change some of their plans.
“One of our companies was in the midst of a [capital] raise. In light of the SVB news, the company simply changed wire instructions to divert funds to another bank,” said Scott Kolesar, co-founder and managing director at venture capital firm Caduceus Capital Partners.
Companies that didn’t get their assets out of SVB in time must grapple with potentially losing hundreds of thousands of dollars from uninsured accounts.
“The most immediate impact clearly is the protection, safety and security of the cash reserves of those portfolio companies,” said Bill Geary, co-founder and general partner at venture capital firm Flare Capital. “The big depositors are not the venture capital firms or growth firms or private equity firms, it’s the portfolio companies that are funding their operations, paying vendors and their employees.”
Experts say companies that used SVB will struggle to pay suppliers and employees with only $250,000 in their accounts. Ashley Tyrner, CEO of FarmboxRx, a company that delivers food as medicine to Medicaid and Medicare recipients, told the Associated Press that a good portion of her business’ profits are now locked up.
Kolesar said his firm will spend time with portfolio CEOs to address secondary impacts and make any corrective moves necessary.
The Associated Press contributed.
This story first appeared in Digital Health Business & Technology.