What the collapse of Silicon Valley Bank means for fashion

Late last week, most people around the world got their first introduction to Silicon Valley Bank when US regulators seized it after it faced a run on deposits.

In the world of fashion startups, the financial institution was a household name. For decades, the Santa Clara, California-based regional bank has been a darling of venture capital firms and the companies they back. Many start-up founders and executives were unable to access the cash they needed to pay employees and vendors. Since the government only guarantees deposits up to $250,000, some companies feared losing the vast majority of their capital.

Fashion companies directly affected by the crash included publicly traded companies like StitchFix and Etsy, inclusive clothing brand Universal Standard and sustainable footwear brand ThousandFell. The consequences were potentially much broader, as many fashion brands that did not bank with SVB rely on payment processing companies that did.

By Sunday, the worst case scenario had been averted. The Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation, a banking regulator, announced they would protect all deposits at Silicon Valley Bank, as well as those at New York Signature Bank, another financial institution that regulators closed due to the risk. . This ensured that companies could pay payroll even if their bank failed.

In the end, the immediate business impact of the whole affair for fashion companies may be minimal, although it was a traumatic 72 hours for many.

“I have been running this business through Covid, the war in the Ukraine, inflation, supply chain disruptions; there have been crises after crises,” said Melanie Travis, founder and CEO of swimwear brand Andie Swim, which kept her capital at SVB. “This one left me speechless. I thought, ‘Oh my gosh, this company just went bankrupt.’ We just lost everything.’”

Like many recent economic problems, the collapse of SVB may be directly related to high inflation. As the bank of choice for start-ups receiving venture capital-financed cash injections, SVB was able to grow rapidly. (From November 2014 to November 2021, its share price increased six-fold.) He invested his deposits in bonds, normally a safe investment, but as inflation and interest rates began to rise, they lost value. When the market found out about this, it triggered an old-fashioned bank run.

The ripple effects are still playing out in the broader economy and will have implications for the fashion industry.

The inflation threat hasn’t gone anywhere: US prices rose 6 percent from a year earlier in February, above the Federal Reserve’s 2 percent target. If interest rates continue to rise, it may expose problems at other banks; Also this week, Credit Suisse, a giant Swiss bank, needed a cash injection from its home country’s central bank.

But the biggest shock for fashion may be what the collapse of SVB represents: perhaps the biggest sign yet that the era of corporate-backed fashion startups may be coming to an end.

As recently as 20 years ago, venture capitalists were wary of funding consumer-focused businesses like clothing or beauty, preferring sectors like healthcare and technology. Social media changed that, as performance marketing allowed companies to more quickly build a customer base and gain deeper data about the customer they are targeting.

SVB was the go-to option for many start-ups and entrepreneurs, offering access to services such as risky debt financing and lines of credit that larger banks would not normally offer to small businesses with unpredictable cash flow.

“They made it very easy for a founder to have turnkey access to a banking partner that grows with them as their company grows, and that was incredibly valuable,” said Jason Stoffer, partner at venture capital firm Maveron, who estimated that half of his portfolio of companies banked with Silicon Valley Bank.

In the past year, startup valuations have plummeted, reflecting concerns that funneling investor cash into Instagram ads would never lead to profitable growth. Inflation and interest rates played a role here, too, both by suppressing consumer demand and making it more expensive for venture capital firms to fund money-losing brands. The failure of SVB was, in this sense, more a symptom than a cause of the problems of the trendy start-ups.

Stoffer said that in the future, the whole incident, and the generally unfavorable economic climate, may lead more fashion companies to go ahead or self-finance their businesses. For brands that decide to go the venture financing route, they are likely to diversify their banking mix.

Chloe Songer, founder of retail circularity platform SuperCircle and ThousandFell, said the company now has two accounts at two much larger banks. Travis similarly moved Andie’s equity to Chase for the time being.

“I have a new bar and it’s just to keep my money,” Travis said.



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Compiled by Sarah Elson.

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