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March 17, 2023 : Healthcare startups may herd to definitive large banks and prioritize conserving money after the fall of regional money lenders Silicon Valley Bank and Signature Bank recently.
The decline of SVB formed a chasm in the life sciences startup sector, locking out budgets temporarily for some firms and cutting off a source of short-term money for healthcare startups.
A central bank and lender for healthcare companies, SVB announced last year that it had customers in nearly half of U.S. venture-backed life sciences and technology organizations.
“At this very juncture, I think most of the companies are going to safety, to the big banks,” stated Ian Chiang, partner at healthcare investing company Flare Capital, “Maybe it’s a little bit of a knee jerk reaction to see what would transpire.”
However, companies may nonetheless deposit with regional banks, depending on proportions. Chiang said that healthcare unicorns, meaning businesses with valuations surpassing $1 billion, will likely not be able to have numerous bank accounts with enough to hold everything under the $250,000 Federal Deposit Insurance Corp. insured limitation.
He added that earlier-stage businesses may still trend toward regional banks if they hold deposits under the FDIC-insured limit.
Platforms like the Financial Times said Monday that large banks, including Citigroup, JPMorgan Chase, and Bank of America, were flooded by smaller lenders’ fund transfer requests. To reimburse for demand, the banks were shrinking their allocated waiting times, with Citi’s private banking division endeavoring to open accounts within a day of application, corresponded to usual turnaround times of one to two weeks.
While flocking to big banks could hamper access to quick, short-term cash for healthcare organizations. Regional banks, like SVB, can serve as dedicated bridges for short-term cash requires for companies. And those loans are usually much harder to get at big banks, told Bill Evans, founder, and CEO of Rock Health.
And it’s unclear if more extensive lenders, containing the Big Four banks, would require to do less venture-capital-backed deals traditionally done through regional banks, expressed Brad Haller, partner at consulting firm West Monroe’s mergers and acquisitions department.
“I think that is going to be the longer term impact of this, that fewer deals are going to be obtaining accomplished, fewer VCs are going to be obtaining the capital that they require, and ultimately [it’s] going to impact innovation,” Haller told.
The uncertainty around banking comes as grant in the healthcare sector has fallen this year, compared to pandemic-driven sizes, and healthcare initial public offerings have lagged and stalled. In 2021, budget for digital healthcare technology reached $29.1 billion; in 2022, funding slipped to $15.3 billion.
Healthcare startups are now concentrating on various ways to extend their cash runway amid an uneasy economic environment, Chiang stated.
“I think more and more of the creators are going to focus on how to enhance the efficiencies of their capital deployment, corresponded in the past where it’s the increase at all charges,” he expressed.
