Published on 10th March, 2023
We often hear the phrase "excessive cash burn" attached to a particular startup or the startup community as a whole. So, what is "excessive cash burn"? and what are the repercussions of it at an individual level and on the ecosystem in which such businesses exist?
We will shed light on the topic by highlighting the recent developments about the Silicon Valley Bank, which provides traditional banking services and funds projects and companies that seem too risky for traditional lenders. Billions of dollars in venture capital flow through SVB.
But the 40-year-old's close relationship with tech ventures leaves it exposed and vulnerable to the dramatic ups and downs the tech industry experiences. These risks were highlighted on Thursday, March 9th, 2023.
SVB was cornered into a rapid sale of its securities, offloading $21 billion worth of holdings at a $1.8 billion loss, according to a financial update on the company's site late Wednesday.
SVB's stock experiences a tremendous rise of 75% in the 2021 market rally. However, it lost two-thirds of its value last year and then plummeted another 60% during trading on Thursday and an additional 22% after the close.
So, what caused such a sharp fall in its value and triggered a panic amongst stakeholders and market observers?
According to SVB’s mid-quarter update, one of the primary problems the bank faces have to do with the amount of money its customers are spending. Total client funds have fallen for the last five quarters, as cash burn has continued at a rapid pace despite the slowdown in venture investing.
"Client cash burn remains 2x higher than pre-2021 levels and has not adjusted to the slower fundraising environment," SVB said.
In January, SVB expected average deposits for the first quarter to be $171 billion to $175 billion. That forecast is now down to $167 billion to $169 billion. SVB anticipates clients will continue to burn cash at essentially the same level as they did in the last quarter of 2022, when economic tightening was already well underway.
It is alarming how startups are struggling to curb their cash burn according to market conditions; continuing in the same direction is not sustainable, and it raises questions about their operational efficiency and financial discipline.
If a startup is highly dependent on external funds to carry out their routine operations or it is essential for them to inject funds into marketing to keep their revenue stream alive, they will always be walking on an endless tightrope, and a misbalance or a slip is inevitable.
Focusing on core business fundamentals and incorporating sustainable practices is crucial for any business, but more so for startups as their products are often in the introduction or growth phase of the product life cycle.
A crisis like the one SVB is facing right now can be well avoided, or at least its impact can be mitigated, if businesses focus on maintaining strong governance and incorporate sustainable practices.
We, at The Real Rating Company, help businesses implement ESG factors in their organization and provide them with a comprehensive rating report on their business.
source of data - https://www.cnbc.com/2023/03/09/silicon-valley-banks-struggles-signal-more-trouble-for-tech-startups.html
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