Bank failure will slow innovation, health system VC executives say

Leaders of health system venture capital arms told Becker's the collapse of Silicon Valley Bank will hinder innovation and make an already risk-averse industry even more so.

"The full impact is hard to quantify, but things certainly will take time to normalize and we can expect that it will slow down the pace of innovation in healthcare," said Mayank Taneja, MD, vice president of venture investments for OSF Ventures, part of Peoria, Ill.-based OSF HealthCare.

Many OSF Ventures' portfolio companies banked with Silicon Valley, the second-largest U.S. financial institution on record to fail, and were scrambling for money to make their next payroll, he said. Last year was already a challenging one for healthcare startups, and 2023 looks to be no different.

"The SVB collapse will certainly make things even harder as investors, in general, will be more cautious," Dr. Taneja said. "Also, I can see venture debt lenders raising the bar for debt provisions for startups."

David Sylvan, president of Cleveland-based University Hospitals Ventures, said the bank's demise should remind startups that, like investors, they need to be vigilant about concentration risk, including not pooling all their cash in one institution.

"In an environment that was already largely risk-off, healthcare VC has narrowed its focus on opportunities with the most potential to realize returns in an evolving regulatory and reimbursement environment," he said. "And the SVB cautionary tale might further challenge health systems' willingness or capacity to deploy limited risk capital into pre-revenue entities." 

Jeffery Stolte, managing partner of Providence Ventures, an arm of Renton Wash.-based Providence, said the situation also presents an opportunity for venture capital-backed companies and their investors to refine how they think about risk related to debt and cash management.

"Providence Ventures works closely with our portfolio to ensure they maintain appropriate diversification among banking relationships to avoid the risks related to concentration," he said. "Health systems have less risk, unless SVB's failure spreads panic to other corners of the financial services industry."

Silicon Valley Bank had not kept up with declines in deposits, leading to a venture capital-driven bank run, making this different from the 2008 financial crisis and its roots in toxic assets and fraud, said Andy Lozier, head of new ventures and business incubation for Columbus-based OhioHealth.

He said the Federal Reserve's new term funding program should prevent a more widespread run on regional banks. Two smaller institutions — Signature Bank and Silvergate Capital — have folded since the government shut down Silicon Valley Bank on March 10.

"Overall, we expect the SVB collapse to have an impact of how venture investors, startups and other key stakeholders think about risk, which should lead to a more conservative posture in the near term," Mr. Lozier said. "At this time we don't expect a material impact to health systems, and while OhioHealth doesn't have relationship exposure to SVB, we are watching the environment closely."

Richard Mulry, president and CEO of Northwell Holdings, part of New Hyde Park, N.Y.-based Northwell Health, said he expects the bank's fall to bring "a heightened sense of caution about certain investments in the medium term."

"Despite these challenges, our focus remains on supporting the success of our portfolio companies," he said. "We are working closely with them to incubate and scale their solutions and build greater strength and resilience in preparation for a potentially choppy market ahead."

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