Start-ups in Singapore to face more difficulties in fundraising after US bank failures, say experts and VCs

SINGAPORE: Tech start-ups in Singapore may be in for a tougher fund-raising environment, with investors likely to turn cautious following the collapse of Silicon Valley Bank (SVB) and Signature Bank in the United States, analysts and venture capital firms told CNA.

US regulators pulled the plug on US tech start-up focused SVB last Friday (Mar 10), making it the largest bank to fail since 2008 when the financial crisis hit. Two days later, regulators also closed Signature Bank, which was widely used by cryptocurrency firms.

Some fears were allayed when the US government said depositors of the failed US banks will have access to their funds, alongside other actions to provide banks with access to emergency funding and stem any broader financial fallout.

But until those deposits are properly disbursed, start-ups in Singapore that have operations or exposure to the US will likely face “operational cashflow issues in the short-term”, said Mr Christopher Quek, managing partner of TRIVE Venture Capital.

The funding of start-ups that have US-based venture capitalists or investors may be stalled or delayed. In particular, crypto start-ups may also experience short-term disruptions as other companies in the sector have lost their banking facilities due to the shutdown of Signature Bank, he said.

The Monetary Authority of Singapore (MAS) said on Monday that it is “in close touch” with Enterprise Singapore to assess any potential impact on local start-ups, including those with operations in the US.

Initial feedback indicates that the impact is “limited”, the central bank said, adding that it will continue to monitor the situation closely for any signs of stress.

CAUTIOUS INVESTORS

Beyond the initial impact, investors may turn even more cautious about putting money into tech start-ups following the sudden bank collapses in the US, analysts and venture capital firms told CNA.

This impact will be “universal” and comes as a double whammy for the tech sector that is already grappling with layoffs and recessionary fears, said Professor Lawrence Loh, director of National University of Singapore (NUS) Business School’s Centre for Governance and Sustainability.

“All investors in start-ups will now be on their toes, they will be cautious and the days of freewheeling (funding environment for) start-ups will be moderated,” he said.

Asia should be even more cautious because the depth of the start-up ecosystem in this part of the world is “not as deep as in Silicon Valley”, Professor Loh said. 

“Any ripple could be potentially earth-shaking.”

Mr Looi Qin En, principal at Saison Capital, said the “vast majority” of local tech start-ups are likely to escape any direct impact, but Southeast Asia’s funding activity could take a hit amid an already-challenging macroeconomic environment.

“We anticipate lower fund-raising activity from US-centric venture capital funds in the Southeast Asia region,” he said, because they need to “stabilise the ship” in core domestic markets.

Mr Looi added that anecdotally, Saison Capital has heard of company founders diversifying risk by starting banking relationships across multiple institutions.

Mr Quek of TRIVE said this saga will “significantly affect” tech start-ups’ plans to expand to the US, and venture capitalists that have a big group of US limited partners will struggle with liquidity.

That said, recent developments may provide some relief for the tech sector if they result in the US Federal Reserve taking a pause in interest rate hikes, said Associate Professor of Finance Vijay Yadav from the ESSEC Business School Asia-Pacific.

This is because rising interest rates have had a “disproportionate effect” on the valuation of start-ups whose cashflows are “expected to arrive far in the future and therefore get more heavily discounted at higher interest rates”, he explained.

NO DIRECT HIT ON SINGAPORE BANKS

The sudden bank closures in the US are unlikely to have a significant direct impact on Singapore’s banking and financial system, experts said, noting that there are several differences which set local lenders apart.

For example, Singapore banks have “diversified, large corporate-heavy and Asia Pacific-centric loan books”, said Maybank Securities Singapore’s head of research Thilan Wickramasinghe.

In fact, there are no banks in Singapore, or across Asia, that focus specifically on the tech start-up ecosystem, according to Mr Looi.

“It is unlikely that we’ll see a SVB-style meltdown in this region,” he said.

Mr Wickramasinghe noted that there may be “some third-degree impact” from the banks’ exposure to private equity or venture capital firms that are investors in affected companies, but this is “several layers removed and the Singapore banks are carrying significant capital buffers”.

MAS, in its statement, said the banking system in Singapore remains “sound and resilient” with “insignificant exposures” to the failed US banks.

Banks in Singapore are well-capitalised and conduct regular stress tests against interest rate and other risks. They also have healthy liquidity positions, underpinned by a stable and diversified funding base, the central bank added.

“These factors will allow them to weather potential stresses from global financial developments,” it said.

Meanwhile, experts described the collapse of SVB as an “idiosyncratic” development due to its unique business model, rather than an indication of broader systemic issues in the US banking sector.

Most commercial banks in the US still have a diversified business model and are much better capitalised than they were before the 2008 global financial crisis (GFC), said UOB’s head of research Suan Teck Kin.

“While some smaller and weaker banks may get into difficulties, the latest episode is unlikely to be a replay of the GFC when the entire financial system seized up,” he added.

Actions by the US regulators thus far have also “greatly reduced the anxiety of depositors across the entire banking system, thus preventing the deterioration of confidence and minimising systemic risks”, Mr Suan said.

Agreeing, Assoc Prof Yadav said the moves taken by the US regulators to protect all deposits and set up a special lending facility for banks will assure customers and help to avert any further bank failures.

“The SVB failure is unlikely to lead to a financial crisis in the US or any other country,” he said.

However, the latest development should serve as “a warning signal for all”, with the rapid increase in interest rates being one of the contributing factors to SVB’s financial troubles.

With rate hikes happening around the world, the current episode “calls for all financial institutions to continually reassess the sensitivity of their portfolios to all kinds of risk including interest rate risk”, Assoc Prof Yadav said.

“The banking regulators in all countries must have taken note of these events. We need to continually review and improve the regulation and supervision of large banks.”