As the technology market falters following the derailing of SVB, what is the outlook for new technology market entrants? Q1/23
Known as “the bank of the innovation economy” Silicon Valley Bank was founded (over a game of Poker it should be noted) because the banking industry did not understand technology startup companies, particularly those that do not earn revenue immediately. With the technology sector already experiencing recessionary conditions – it has to ask itself: was the light at the end of the tunnel a train after all and if so, how do we get out of the way?
Why did SVB collapse?
Silicon Valley Bank historically focused on short-term lending. The bank structured its loans with the understanding that startups do not earn revenue immediately, managing risk based on this business model. The bank connected customers to its extensive venture capital, law, and accounting firm networks. Its main strategy was collecting deposits from businesses financed through venture capital. It then expanded into banking and financing venture capitalists, adding services to allow the bank to keep clients as they matured from their startup phase.
However, in 2021, SVB shifted to long-term securities like treasuries to achieve higher yields, neglecting to safeguard their liabilities with short-term investments for rapid liquidation. As a result, SVB experienced insolvency for a number of months and could not liquidate assets without considerable loss.
When economic factors such as rising interest rates and dwindling Venture Capital impacted the technology sector, a significant number of SVB clients withdrew funds. SVB lacked the readily available cash to liquidate these deposits because their funds were locked in the new long-term investments. They began selling bonds at a substantial loss, causing distress to customers whom withdrew their deposits simultaneously due to fears of the bank’s solvency.
What are the problems the Technology sector faces?
The technology sector has recently encountered recessionary conditions, prompting major technology companies to downsize. The collapse of one of their most significant suppliers and supporters may lead to funding challenges for startups, as management teams at other banks are hesitant and lack the requisite knowledge and experience, to assume the risk of investment.
The collapse of SVB highlights the importance of sound financial management in both favourable and unfavourable economic conditions. In a recessionary climate, technology companies must exercise extra caution, considering rising interest rates, supply chain disruptions, and difficulties in raising additional capital.
What of new market entrants? In a recessionary environment, it is assumed that barriers for new markets entrants will have been raised higher, so addressing these challenges will distinguish between the new technology companies that take off to reach dizzying heights, from those that don’t even make it to the launch pad.
What are the barriers to entry for new technology market participants?
Access to finance: Developing new technology projects can require substantial upfront capital investment, requiring significant upfront investment for R&D, prototyping, manufacturing, and marketing. This high capital requirement can be a major barrier for startups and smaller companies.
Cost of capital: When access to finance has been overcome the next hurdle is the cost of capital, a challenge here is perceived higher risk due to the unproven technology, lack of data and/or scaled data, or simply lack of track record.
Intellectual property protection: Protecting intellectual property (IP) is crucial for technology companies, but it can be challenging and expensive to secure patents, trademarks, and copyrights. Additionally, new entrants may face legal challenges from established competitors attempting to protect their own IP.
Talent acquisition and team building: Assembling a skilled team with diverse expertise is essential for developing and launching a new technology or project. Finding and retaining the right talent can be challenging, particularly in competitive fields where skilled professionals are in high demand.
Regulatory & compliance hurdles: Many industries have strict regulations that govern the development, testing, and deployment of new technologies. Navigating these regulations and ensuring compliance can be time-consuming, costly, and complex, especially for new entrants.
Market competition: New technology market participants often face competition from well-established players with significant market share, brand recognition, and customer loyalty. Overcoming this competition can be difficult, especially if the incumbent firms have economies of scale, strong distribution networks, or exclusive partnerships.
Technological complexity: Developing cutting-edge technologies often requires advanced technical skills, specialized knowledge, and access to sophisticated tools and equipment. Acquiring these resources and building the necessary expertise can be a significant barrier for new entrants.
Consumer adoption: Convincing consumers to adopt new technologies can be challenging, particularly if the technology requires a significant change in behaviour or the benefits are not immediately apparent. Overcoming consumer scepticism and building trust can be a significant barrier for new market participants.
Supply chain & distribution challenges: Developing a reliable supply chain and establishing distribution networks can be complex and resource-intensive, especially for new technology companies that lack existing relationships with suppliers and distributors.
Grid Integration & Interconnection: Introducing new energy technologies into the grid, a requirement if we are to even meet climate goals let alone exceed them, can be challenging due to technical issues such as grid stability and reliability, variability and intermittency, and regulatory barriers.
To help overcome a number of these challenges exists a support ‘ecosystem’ which is quite unique to the technology sector. In itself this ecosystem is robust and diverse, providing a range of resources to help startups and other innovators succeed. These support systems play a crucial role in fostering innovation and helping new technology developers overcome challenges and bring their ideas to fruition.
What is this tech ‘ecosystem’ formed of?
The technology support ecosystem is made up of a variety of organisations, programs, initiatives and institutions that provide funding, mentorship, and other resources to help tech entrepreneurs, startups and other innovators bring new technologies to market.
Incubators and Accelerators: These programs provide startups with resources such as office space, mentorship, networking opportunities, and sometimes funding. Incubators tend to focus on early-stage companies, while accelerators aim to help more mature startups scale rapidly.
Venture Capital & Private Equity: VC & PE firms invest in new technology companies, providing financial investment and practical support, in exchange for equity. These firms can also offer mentorship, industry connections, and guidance to help startups grow and succeed.
Govt & Supranational Programs & Grants: Governments & Supranational organisations often have funding programs, grants, and other initiatives specifically designed to support the development and commercialization of new technologies. These programs may provide financial assistance, tax incentives, or other resources to help startups succeed.
University Research & TTOs: Universities often support new technology development through research programs and Technology Transfer Offices. These offices help researchers commercialize their innovations by providing resources, guidance, and connections to industry partners.
Industry-Specific Support Programs: Many industries have established programs and initiatives to support the development of new technologies within their specific field. These programs may offer funding, mentorship, or other resources to help startups develop and commercialize their innovations.
Networking and Professional Associations: Joining professional associations or attending networking events can help technology developers connect with like-minded individuals, potential investors, and industry experts who can offer advice and support.
Online Resources and Communities Numerous online resources, forums, and communities cater to technology developers, providing information, advice, and opportunities to connect with others in the field. Examples include industry-specific websites, social media groups, and online platforms (including AI) for entrepreneurs.
The Insurance Markets: Over the last decade a new type of insurance has emerged that supports the development of new technologies. Technology Performance Insurance (TPI) is a risk transfer process that can transfer the technology performance risk of a new technology or project, away from the investors, developers and lenders – to the Insurance Markets.
What is Technology Performance Insurance?
Matrix collaborates with insurance and reinsurance partners to transfer precisely measured technology and financial risks to the insurance markets, which provides clients with the necessary financial and customer support to expedite their innovations. Insufficient data often obstructs revolutionary technologies from obtaining financing, entering the market, and gaining widespread consumer acceptance.
Using unique proprietary modelling to evaluate the unpredictability of technology performance and dependability, as well as the associated economics, and in turn defining practical consequences of a project or new technology. A new technology developer may need Technology Performance Insurance for several reasons:
Securing Investor & Lender Confidence: Investors and lenders want assurance that their investments are protected from risks that may arise during the project lifecycle. Technology Performance Insurance can provide such assurance, thus increasing the confidence of investors and lenders in the project.
Mitigating Technology Risks: Technology is an integral part of most business operations, and any disruption to it can have a significant impact on a project’s success. Technology Performance Insurance can provide protection against a wide range of technology-related risks, such as system failures, data breaches, cyber attacks, and software glitches.
Facilitating Business Growth: With Technology Performance Insurance, project developers can focus on growing their business without worrying about technology risks. They can use the insurance coverage to expand their operations, develop new products, or enter new markets with confidence.
Meeting Regulatory Requirements: Some regulatory bodies require project developers to have certain types of insurance coverage to comply with regulations. Technology Performance Insurance may be necessary to meet such requirements.
Minimizing Financial Losses: In case of technology-related disruptions, the cost of repairing or replacing damaged equipment, restoring lost data, and addressing any legal liabilities can be significant. Technology Performance Insurance can help project developers minimize these financial losses.
Consequently, Technology Performance Insurance provides a comprehensive solution to address technology-related risks and liabilities that new technology and project developers may face, during the project lifecycle. A TPI Policy can help project developers to protect their investments, increase investor and lender confidence, comply with regulations, minimize financial losses, and facilitate commercial growth and scale.
How is a TPI Policy formulated?
The process for assessing technology performance involves reviewing (and a deep knowledge of) recent developments and insights in science, engineering, and big data. The process includes analyzing engineering reports, test data, and economics, as well as conducting onsite facility visits.
Proprietary technological-economic parameters are then used to measure risk based on technology use and financing. A proprietary modelling review includes technical considerations such as scale-up analysis, performance data, EPC and key contracts, design and manufacturing plans, and operations and maintenance plans. Use case, economics, and financing are integrated to align interests and address technical risks with overall cost-effective insurances.
Economic considerations include contractual structure, debt service coverage ratio, all-party alignment of interest, project cash flow and reserves, project stakeholder requirements, and value of insurance.
As of Q1 2023, one insurance company alone has (so far) placed $3 billion exposure in support of over $40 billion capital, to support new and emerging technologies.
If we are to meet stated climate goals and the technology sector is going to thrive once again, then the Insurance Markets are positioning to be a key driver in helping this crucial sector to get back ‘on track’.
Matrix are fully authorised and regulated by the Financial Conduct Authority.
” Proprietary technological-economic parameters are then used to measure risk based on technology use and financing. A proprietary modelling review includes technical considerations such as scale-up analysis, performance data, EPC and key contracts, design and manufacturing plans, and operations and maintenance plans. Use case, economics, and financing are integrated to align interests and address technical risks with overall cost-effective insurances. “
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