Saving Silicon Valley Bank UK: How the British tech sector averted disaster

Saving Silicon Valley Bank UK: How the British tech sector averted disaster
Опубликовано: Tuesday, 14 March 2023 06:34

Government ministers, tech executives and civil servants scrambled to save the go-to bank for the country’s digital sector.

LONDON — British officials woke up Saturday with a ticking time bomb: find a new home for Silicon Valley Bank’s local operations or face a potential implosion to the United Kingdom’s tech sector.

Amid a flurry of late-night WhatsApp messages, intensive lobbying from high-profile techies, and last-minute negotiations with HSBC, the Treasury Department pulled it off — and allowed the U.K.’s startup community to breathe a sigh of relief after the tech industry’s go-to bank was scooped up by its much-larger rival.

“I was extremely relieved,” said Andy Cockburn, co-founder of Mention Me, a British startup, who penned an open letter to the U.K. government on Saturday urging politicians to step in and save the bank. The request for support garnered more than 140 signatures from other U.K. startup founders in less than two hours.

“There were tens of thousands of employees at risk,” he added. If the bank had gone under, “it would have set back the industry 20 years.”

POLITICO talked to government officials, industry executives and others involved in saving Silicon Valley Bank’s U.K. wing that oversaw roughly $7 billion in deposits from 3,000 groups — from lowly startups to high-flying venture capitalists — across the country’s tech industry. In the Treasury, the rush to save the bank was dubbed “Project Yeti.”

What emerged was a realization over the weekend at the top of the U.K. government that saving the financial institution was central to the country’s credibility as one of the world’s most prominent centers for tech and innovation.

Few, if any, voters have ever heard of the bank, which almost exclusively services fledgling companies that may not be able to find banking products at more mainstream rivals.

But for the country’s multi-billion pound tech industry — one of the engines for economic growth and a clear representation of the country’s aspirations for its Global Britain strategy — the demise of Silicon Valley Bank’s British operations represented an existential threat to the country’s ability to play on the global stage.

“I said yesterday that we would look after our tech sector, and we have worked urgently to deliver that promise,” Chancellor Jeremy Hunt, the British finance minister, said after announcing HSBC’s purchase of the bank on Monday.

He stressed no government money had been used to support Silicon Valley Bank amid the U.K.’s ongoing sluggish economy, rolling strikes from public sector workers seeking double digital pay rises, and questions over whether London was committed to making its domestic tech industry central to its future plans.

Contagion alert

People started to get jumpy on Friday soon after Silicon Valley Bank’s share price in the United States tumbled 60 percent — and investors scrambled to take their money out of the institution.

For British startups, frantic calls with California did little to assuage fears. Founders tried desperately to remove their money even as the bank told them U.K. deposits would not be affected because they had been ring-fenced for their protection, according to three tech executives, who spoke on the condition of anonymity to discuss internal discussions with Silicon Valley Bank.

“It became rapidly clear that they weren’t going to be fine, and there was going to be a confidence crisis,” another industry representative involved in those discussions told POLITICO. “Depositors were fleeing.”

More bad news was to come. With British techies mostly in the dark about what would happen to their money, the Bank of England — the independent arbiter of the country’s financial system — announced late Friday that Silicon Valley Bank’s U.K. operations would be put into insolvency.

What freaked the tech industry out, according to two of the founders who spoke to POLITICO, was that Threadneedle Street said the institution only had a “limited presence” in the country with “no critical functions supporting the financial system.” That message — that the Bank of England may not see the importance of the bank to the country’s tech industry — galvanized a coordinated campaign to convince the government to step in to save the institution.

“That was the point at which panic ensued,” said one of the tech industry figures who spoke to POLITICO, explaining the statement gave little in the way of assurances the government was going to act.

WhatsApp diplomacy

By Saturday, Britain’s financial heavy hitters started to spring into action.

After an early morning call between Hunt and Andrew Bailey, the head of the Bank of England, officials started approaching Silicon Valley Bank’s local customers to find out just how exposed they were.

To make their case, industry officials created a “Save UK Tech Working Group” WhatsApp group on Saturday that was joined by almost 100 entrepreneurs and venture capitalists to coordinate their message to government. Dom Hallas, executive director of the Coalition for a Digital Economy (COADEC), a well-connected lobby group for the startup sector, quickly emerged as the quasi-leader for those interactions.

Cockburn, the U.K. startup founder whose business was directly affected by the bank’s implosion, separately wrote an open letter urging Hunt to step in. He shared it with several other WhatsApp groups and, within two hours, had 140 signatures from across the country’s tech sector.

That letter was then promoted heavily by outspoken advocates, culminating with Andrew Griffith, the government’s city minister, and Michelle Donelan, the new science and technology secretary, hosting a virtual roundtable later that day with industry representatives, including UK Finance, COADEC, Tech Nation, Innovate Finance and BVCA. Their message: the bank’s collapse would be “apocalyptic.”

Central to that pitch to ministers, according to industry representatives, was how the Bank of England’s initial statement on Friday had not calmed people’s nerves.

“Within half an hour we could see that the government got it,” Julian David, head of TechUK, an industry group, who joined the call from Madrid where he was watching a soccer game, said.

Why should we care?

Part of the industry’s lobbying pitch was to explain to wary politicians why they should step in and help.

Across social media, industry executives urged affected startups to submit their stories via an online form to the U.K.’s Treasury Department to explain what would happen if they lost their money via Silicon Valley Bank’s collapse.

Russ Shaw, founder of Tech London Advocates, an industry group that helped to coordinate the effort, said companies varied from those working on quantum computing problems to IT providers to the National Health Service. They were all facing imminent closure if they didn’t get some form of support. Businesses with less than £20,000 at the bank and some with up to £10 million in deposits were all worried about how they would pay their employees by Monday.

“It was going to create huge problems for them come Monday morning," said TechUK’s David when asked about the likely problems if Silicon Valley Bank wasn’t saved. "But by Saturday the government really did react at speed."

In search of a new owner

Amid this industry lobbying, Silicon Valley Bank and government officials were also doing something more basic: looking for a new owner.

By Saturday afternoon, a number of financial institutions had expressed interest in buying the U.K. operations, according to a government official familiar with internal developments who spoke on the condition of anonymity to describe internal conversations. By Saturday evening the idea of a government-led bank rescue had effectively been ruled out.

Among the interested buyers was the Bank of London, a so-called clearing bank that had launched just two years ago; Oaknorth, also a relatively young institution that counts former Chancellor Philip Hammond among its advisers, and ADQ, an Abu Dhabi state-backed investment vehicle.

To help speed up the bidding process, Silicon Valley Bank set up a “data room” for prospective buyers, and government officials began assessing the various proposals, although work continued on other options to protect deposit holders in case a private sale could not be reached.

It was only on Sunday morning that HSBC formally started discussions with officials.

With Hunt about to face two major broadcast interviews with the BBC and Sky News — a traditional pre-budget fixture that had long been penciled into his schedule — the Treasury got ahead of the story, issuing a statement at 7.30 a.m. on Sunday insisting it was “working on a solution,” including on plans to provide short-term cash for affected techies.

By the afternoon, Rishi Sunak, the British prime minister, was 10,000 meters above the Atlantic on his way to San Diego for defense talks with his American and Australian counterparts. He spoke to Hunt, Bailey and other officials shortly after taking off at 2 p.m., and again six hours later at 8 p.m. with a deal still not yet clinched, and amid signs negotiations were going to go through the night.

When Sunak moved to the back of the plane for the customary discussion with traveling reporters, he was peppered with questions: What was the government doing? Would there be a bailout for Silicon Valley Bank U.K.? The PM said that the Treasury was working through the weekend to sort out the problem, and that customers should not panic. More information, Sunak added, would follow.

As news began to swirl of the U.S. government bailout, financial journalists on the plane began to send messages back to the traveling Downing Street press officers: would the UK take similar action?

Meanwhile, Sunak seemed animated by the crisis. He returned for more informal chats with reporters, revealing he had been on the phone with the Treasury for the previous few hours.

As the U.K. leader headed to California, the markets in Japan opened and there was still no word about the U.K. response. Downing Street said a Treasury statement would follow at 7 a.m. U.K. time on Monday.

But even as the HSBC bid, which ultimately saw it buy Silicon Valley Bank’s U.K. business for a nominal £1, was coming together, officials were still working on a so-called “Bridge Bank” option, where the Bank of England would take control of the business, and the government-owned British Business Bank providing short-term cash, in case the private deal collapsed at the last minute.

“Like in the financial crisis, there was a sense of what sort of shotgun wedding can we organize here,” the tech industry representative involved in discussions quoted above said.

The Bank of England is bound by a strict set of rules when dealing with a failing bank that includes protecting public funds after the taxpayer bailouts resulting from the 2008 financial crisis. While insolvency was the preferred option Friday, the Bank had to determine whether further action was in the “public interest” and then work through the tools available to smooth out disruption to the wider economy. That includes a sale of a business and, over the course of the weekend, that became the favored solution for Threadneedle Street.

Waiting by the phone

As Sunday ticked into early Monday morning, tech founders and venture capitalists — many of whom had spent the weekend ensuring they could pay their staff before Monday morning — began hearing rumblings of a deal, but had yet to be briefed on the specifics. Many had their own personal wealth locked up in the defaulting bank, adding an extra layer of stress to many of those affected.

It was only on Monday morning that they heard what many had been hoping for: a government-backed HSBC takeover of Silicon Valley Bank’s British operations, effectively ending a short-term crisis that could have materially damaged the country’s tech sector.

Over the weekend, government officials had sounded out companies about their willingness to stay at the bank if a new owner could be found, according to three tech executives who held meetings with those officials. The goal was to ensure Silicon Valley Bank’s British operations would still be a viable proposition when transferred to a new owner, they added.

“The government deserves huge credit,” said COADEC’s Hallas. “From the very top, to HM Treasury who understood the challenge and gripped it, to the huge number of civil servants who have likely not slept since Friday. They have saved hundreds of the U.K.’s most innovative companies today.”

For others, the weekend’s mayhem showed the willingness of London to quickly step into the breach and how the country’s tech sector eventually pulled together to convince initially-skeptical policymakers of the importance of a bank that almost no one outside of the industry had ever heard of.

“We’re all exhausted,” said Shaw, founder of Tech London Advocates. “It’s not a weekend that anyone would have planned.”

Rosa Prince and Hannah Brenton contributed reporting

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