It’s already been one year since Silicon Valley Bank (SVB) and Signature Bank—two of the largest banking partners for the tech sector at the time—were abruptly shuttered.
While the wound this inflicted is still fresh for many—after all, SVB had backed upwards of 40 percent of venture-backed technology and healthcare companies in the United States when they closed—it’s worth bearing in mind the broader fallout from these sudden closures:
- Shortly after the SVB news broke on Friday, March 10, 2023, the four largest U.S. banks alone lost roughly $50 billion dollars in market share, while more than $80 billion in stock market value evaporated from the 18 banks making up the S&P 500.
- The impact was global, with declines across markets in Asia and Europe as shares in HSBC and Barclays dropped 4.8 percent and 3.8 percent, respectively, following the news.
None of this is lost on customers of the banks themselves. While SVB has since reorganized and is back in the VC game, many businesses who had partnered with the bank at the time remember all too well being unsure if they’d be able to make payroll.
To that end, it wasn’t until later that weekend—an eternity for CFOs—that the FDIC assured SVB customers that they would backstop all depositors through the Deposit Insurance Fund (DIF).
This all bears repeating following recent comments from US Federal Reserve Chair Jerome Powell, who warned that similar bank failures are likely inevitable given a few key market realities.
We’ll break down how innovative businesses should interpret Powell’s recent statements to the Senate Banking Committee, how current market conditions compare to what was happening during past banking crises, and the benefits of a diversified capital strategy to maintain liquidity in any market.
Medium-sized banks most at risk
“This is a problem we’ll be working on for years more, I’m sure. There will be bank failures,” Chairman Powell warned during a March 7 hearing on the Fed’s monetary policy before the Senate Banking Committee.
While a jarring statement on it’s own, Powell has clarified that unlike the banking crisis that struck in 2008, he anticipates future closures will spare the largest lenders. A large reason is that many of the largest banks were designated “systemically important” (read: too big to fail) in the aftermath of the 2008 financial crisis.
“It’s not a first-order issue for any of the very large banks. It’s more smaller and medium-sized banks that have these issues. We’re working with them. We’re getting through it. I think it’s manageable, is the word I would use,” he said.
At the heart of these tighter lending conditions are sinking commercial real estate values, which have plummeted across almost every major market globally following the pandemic. Simply put, with fewer workers going into offices today, once-costly real estate investments are no longer a business-critical expense for many businesses.
As a result, many Commercial real estate investment trusts (REITs) have been in negative territory since the start of 2024. This has begun to trigger an avalanche of economic repercussions: With fewer workers populating downtowns across North America, not only are offices empty, but there are fewer retail customers to support commerce in core districts.
But rather than seek short-term solutions, Powell has indicated that this ‘secular change ‘ in the economy—while painful for many as the number of medium-sized banks inevitably consolidates—will need to be reflected in the lending landscape.
Although Powell stopped short of detailing the regulatory measures planned to shield the most vulnerable banks from negative REIT exposure, the Fed has at least been proactive in reaching out to the institutions they’ve flagged as most vulnerable.
“We are in dialogue with them: Do you have your arms around this problem? Do you have enough capital? Do you have enough liquidity? Do you have a plan? You’re going to take losses here — are you being truthful with yourself and with your owners?” Powell told Senate leadership.
What does this mean for innovation funding?
These bank failure warnings are of course tied closely to larger struggles across the global business landscape. Commercial REITs and retail are just two pieces of a massive puzzle that impact interest rates, inflation and the tighter lending conditions many businesses face in today’s economy.
As we discussed previously on the blog, these are a few of the conditions that are deflating the EBITDA forecasts for CFOs across the middle-market and beyond.
By the numbers, Gartner anticipates:
- Only 2 percent revenue growth through 2027 (based on weak GDP forecasts);
- A 5 percent jump in labor costs across the US and Eurozone;
- An 8 percent increase in technology costs globally;
- US long-term inflation of 3 percent through the end of the decade.
To avoid falling into a spiral akin to SVB and Signature Bank, many banks will be focusing on the near-term payback risk of their investments until labor and material costs better align with consumer demand over the course of the decade.
Part-in-parcel with this will be the requirement of longer operational and development runways for any organizations that seek sources of outside funding. As we recently discussed with saascan founder Lauren Thibodeau on our podcast, lenders are now looking at a minimum 18-24+ month runway before bringing a company into their portfolio, compared to 12 months just a few years back.
However, as Gartner VP of Research Randeep Rathindran explained in a recent report, “CFOs can help their organizations overcome reliance on high-interest debt by broadening their view of funding sources beyond bank lending and corporate bonds.”
“Financial leadership should explore secondary equity issues, venture capital, and non-dilutive financing options […],” Rathindran continued.
How innovation can extend runway, drive value
A powerful (and underutilized) source of non-dilutive funding are R&D tax credits, which CFOs can use to reinvest a share of the capital they’re already put into their product development.
Each year in the US, businesses can claim up to $500,000 to offset payroll, income or any other tax liabilities related to R&D as part of the IRC Section 41 tax credit. That means up to $500,000 in liquid assets can actually stay in your business’ bank account each year if your team is able to secure a successful claim with the IRS.
Canada’s SR&ED program similarly serves R&D-focused CCPCs of all sizes and across industries, providing almost $4 billion in support to over 22,000 innovative Canadian businesses in 2021 alone.
In total, this represents more than $20 billion in available R&D tax credits that can help innovative businesses retain some liquidity and actually double down on driving more value.
But on both sides of the border, accessing these claims calls for the ability to speak not just the language of innovation, but also the vernacular tax code of either the CRA or IRS.
Your partner for non-dilutive funding
By combining decades of combined human expertise in navigating tax code—while also being a team of founders in our own right—with a platform that synchronizes key financial, project workflow and payroll data into a single system of proof, Boast leaves no stone unturned in digging deeper to uncover all of your credit-worthy activities.
In the context of investors, businesses that take advantage of these non-dilutive funding opportunities are showing that they are savvy with their budgets, making their business a stronger candidate for funding than businesses that leave R&D tax credits on the table.
Instead, businesses that receive money back from the government to continue funding innovation are demonstrating to investors that their R&D is so impactful innovative, that even the federal government wants to support its success.
This could be one of the most powerful bona-fides in your corner when pitching your solution to potential investors.
To learn more about how Boast combines leading technology with years of expertise in the innovation ecosystem for the industry’s leading R&D tax credit solution, talk to an expert from our team today.
