Silicon Valley Bank Failure Could Hurt Digital Health Investments

The Federal Deposit Insurance Corporation’s decision on Friday to take over Silicon Valley Bank is likely to leave many digital health companies scrambling to pay employees and suppliers.

SVB, the nation’s 16th largest bank and headquartered in Santa Clara, California, was a major 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 the failure of SVB is another sign that the digital health venture funding market is long overdue. Funding has slowed significantly from its 2021 high. While the overall for 2022 was the second best year since the digital health business and technology began tracking the data in 2010, Fourth quarter was the lowest quarterly funding in five years, Most experts say 2023 will be worse.

“We had a long period of very low interest rates, essentially free money, and we’re not likely to return to that type of environment,” said Matt Wolf, a director and senior health analyst at the consulting firm RSM. “This is the environment that digital health operators need to be accustomed to.”

Depositors rushed to the bank on Thursday following the collapse of SVB and a quick takeover by the FDIC. Notably, the FDIC did not wait until after the close of business to seize the bank, as is typical in an orderly closing of a financial institution.

The FDIC created the 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 by Monday morning, uninsured depositors will receive an advance dividend and a receivership dividend, and potentially additional dividend payments if bank assets are sold. Customers with accounts over $250,000 were told to contact the FDIC.

The FDIC stated that the bank had $209 billion in total assets at the time of the failure. A report by S&P Market Intelligence stated that 97.3% of SVB’s deposits were uninsured.

Bank of the Digital Health Economy

SVB was the banker to several digital health startups and venture capital firms. The bank was used by 76% of venture capital-initial public offerings in healthcare since 2020, according to data cited on the bank’s website.

Its digital health clients include home healthcare providers DispatchHealth Raises SVB Funding For Its $330M Round in November; Primary care firm Oak Street Health secures $300 million credit facility from SVB ,which worked out a credit facility with Hercules Capital in November); and Pravia Health, a physician enablement company. SVB said it had $100 million in financial commitments to Privia, according to the bank’s website.

DispatchHealth said it would continue as business as usual and asked the FDIC additional questions. Privia and Oak Street Health did not respond to requests for comment.

A financial analyst who requested anonymity to comment said that hours before the FDIC arrived, digital health customers with uninsured accounts were attempting to withdraw deposits from SVB, while other banks Calling to guarantee deposit.

Dr. Michelle Longmire, CEO of Medable, a clinical trial tech company, said on twitter She was “saddened but also deeply relieved to report I successfully navigated a run on a bank.”

The rapid failure of the SVB forced the companies to change some of their plans.

“One of our companies was in the middle of [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 of venture capital firm Caduceus Capital Partners.

Companies that do not receive their assets from SVB in a timely manner will face the prospect of losing hundreds of thousands of dollars from uninsured accounts.

“The most immediate impact is obviously the safety, security and protection of the cash reserves of those portfolio companies,” said Bill Geary, co-founder and general partner at venture capital firm Flare Capital. “The large depositors are not venture capital firms or growth firms or private equity firms, it’s portfolio companies that are funding their operations, paying vendors and their employees.”

Experts say companies using SVB with only $250,000 in their accounts would struggle to pay suppliers and employees. Kolesar said his firm would spend time with portfolio CEOs to iron out secondary effects and take necessary corrective steps.

The Associated Press contributed.

This story was first published in Digital Health Business & Technology.

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