SVB’s rescue is an unexpected credibility boost for the UK Science and Technology Framework

The rescue of SVB  showed that the UK government not only acted decisively in relation to a critical sector for the UK economy, but in the process showed that its newest policy Framework can involve meaningful action as well as words

By last Friday night, SVB was a dead duck. The talk was of the bank’s insolvency, and a catastrophic impact on a large number of UK tech startups. The prospect of a last minute rescue seemed remote, and instead it seemed as if the bank’s demise would be another bad news story for UK tech, after WANdisco became the latest homegrown software business to announce a listing in New York rather than London.

But by early Monday morning a different story was emerging. The Chancellor Jeremy Hunt had already expressed his strong desire to save the UK arm of SVB, and it became clear that Treasury officials, banking regulators, a number of potential buyers and various teams of lawyers had worked through the weekend to achieve this. Rishi Sunak, was said to be personally involved.

When it came, the announcement of SVB’s rescue was all the more surprising. HSBC had bought the bank’s assets for £1, customers could access their money and banking services as normal, and all without any public expenditure. Although the exact impact would have been hard to measure, there was speculation that the loss of SVB UK would have seriously damaged several thousand tech businesses, in particular those with more substantial deposits, above the cap guaranteed by the Bank of England.

It was said that a third of companies in the UK tech sector would have been in serious peril. But why had one small UK bank suddenly become such a priority for Hunt, Sunak and the UK government? And why link this to the grandly named UK Science and Technology Framework, another initiative launched by yet another new government department, and as ever promising transformational change?

The answer lies in SVB’s disproportionate importance for startups and scaleups in the UK, most of which involve technology and innovation, two sectors that the UK government regards as critical. Startups are not conventional businesses, and founders have always struggled with their banking arrangements.

SVB made it easy for them. SVB understood that startups rarely make profit in their early years, and tend to survive on money from friends and family, and further sporadic rounds of equity funding rather than institutional debt. A startup’s growth can be erratic and hard to predict, with innovation often preferred over governance, but the most successful can become large and highly profitable enterprises. Many of such businesses are backed by VCs in their early years, and not only did the VCs encourage banking with SVB, some were also customers of the bank.

The UK government has long supported startups with various tax incentives and subsidies, but the news on Monday was still a pleasant surprise to many. While most commentators in the sector felt that SVB’s failure would be dangerous, others felt that the survival of the UK tech sector should in no way depend on such an intervention.

The government’s position may partly be explained by the launch of the UK Science and Technology Framework, just a week earlier on 6 March. This has the stated aim of making the UK “a science and technology superpower by 2030” and “the most innovative economy in the world”.

In her introduction to the initiative, which was strongly backed by Sunak, the Secretary of State Michelle Donelan details a number of specific proposals, including an immediate investment of £500m in various new and existing projects. At a time when the government is trying to encourage economic growth in the economy as a whole, ministers are focussing on those sectors which have thrived despite the turmoil of the last few years. 

Donelan states that “Innovation and technology are our future” and the “technologies of tomorrow” are said to comprise quantum, AI, engineering biology, semiconductors, future telecoms, plus life sciences and green technologies. We at Kingsley Napley specialise in acting on fundraisings for early-stage companies, and you won’t be surprised to learn that many of these companies operate in these sectors.

There has been some criticism that the scale of this support is still too little, bearing in mind the current economic challenges, and that the UK’s re-entry into the Horizon Europe research programme should be a higher priority, but in general the Framework seems to have been welcomed by the UK tech sector. As ever with policy launches, there is a need to back up big promises with tangible actions, but the speed and success of Hunt’s response to the SVB crisis gives the Framework greater credibility.

HSBC may not be the obvious new home for tech startups, and SVB in the UK will still be missed, but larger and more established banks clearly see the value in this market, and it is hoped that they start to better tailor their services to this quite distinct market. Challenger banks will also see the opportunities.

When it came to the crunch the UK government not only acted decisively in relation to a critical sector for the UK economy, but in the process showed that its newest policy Framework can involve meaningful action as well as words.

FURTHER INFORMATION

If you have any questions about any of the issues covered in this blog, please contact James Fulforth or a member of our Corporate, Commercial & Finance team.

ABOUT THE AUTHOR

James Fulforth joined Kingsley Napley as a partner in the corporate and commercial team in November 2007, and has led the team from 2014. He practises in both corporate and commercial law, and has particular experience in the technology, fintech, real estate, media/entertainment and travel sectors. He trained at a large City firm and has also worked in-house for an international provider of online travel services.