Source: Hedgehog Commune
Text丨Tao Huidong
There has been too much bad news in the global primary market recently.
First, as the leader of PE, Blackstone, the BREIT fund with a scale of more than 60 billion US dollars will undergo redemption at the end of 2022, and then the BPP fund with a scale of more than 70 billion US dollars has also received redemption requests equivalent to 7% of the total fund size. Then in February 2023, Blackstone announced a default on a bond of 531 million euros.
Immediately afterwards, on March 10, Silicon Valley Bank was shut down by regulators due to a run on the bank. Tech-focused Silicon Valley Bank is the 16th largest bank in the U.S. and one of the most used by startups. After the incident, 325 venture capital institutions and 650 founders jointly declared: Silicon Valley Bank cannot fail.
Not to mention, since 2022, the news of the fall of unicorns has been one after another, and some popular tracks in the past have started the death mode of unicorns in batches.
Overnight, the world seemed to be short of money everywhere.
Unicorns fall in droves
In the same week that the bank run in Silicon Valley occurred, Embark, a self-driving truck unicorn in the United States, announced its bankruptcy. 70% of its employees were fired directly, and the remaining 30% handled the company's shutdown process. The founder of the company, Alex Rodrigues, said in an email sent to the whole company: "The capital has abandoned us, and we cannot raise funds." Embark will be listed on the backdoor in June 2021, with a market value of US$36 billion at its peak. This is at least the second star unicorn to fall on the autonomous driving track since 2022. Prior to this, Argo, the L4 autonomous driving unicorn invested by Ford and Volkswagen, has declared bankruptcy.
In the biotechnology track, there have been at least four bankruptcies of star companies since 2023.
On January 6, Nabriva, an innovative anti-infective drug research and development company engaged in the treatment of severe infections, was revealed to have been shut down.
On January 9, Calithera Biosciences, a new drug research and development company for renal cell carcinoma, announced the dissolution of the company and liquidation of assets.
On January 26, Theonys, a tRNA drug research and development company, announced its closure due to disagreements among investors.
On Jan. 27, kidney disease drug biotech Goldfinch announced it was closing down due to “fundraising challenges in the current macro environment.”
These four biotech companies that fell in early 2023 have all had brilliant careers. Nabriva was spun off from the pharmaceutical giant Novartis; the founder of Goldfinch is the former senior vice president of early clinical development at AstraZeneca, and has received a total of US$210 million in financing since its establishment in 2016; Theonys founding team includes Harvard University, MIT All of them are pioneering scientists in the field of tRNA epitranscriptomics.
web3 and Metaverse should have been the hottest innovations in 2022. But in the second half of 2022 alone, at least eight cryptocurrency unicorns will file for bankruptcy, including FTX, which was once the world's second largest cryptocurrency exchange and once reached $32 billion.
Globally, the number of unicorns is decreasing dramatically. According to CB Insights, from the first quarter to the fourth quarter of 2022, the number of new unicorns in the world has dropped by 85%. At the same time, technology layoffs are sweeping the world. The layoff tracking project Layoffs.fyi mainly tracks the layoffs of technology companies in North America, Europe, and India. It records that by 2022, 1,300 technology companies around the world will lay off a total of 280,000 people.
The highly valued "head" companies that were once sought after suddenly found that financing has become extremely difficult. EY data shows that in the United States, there will be more than 70 financings with an amount of more than US$100 million per month on average in 2021, while there will be only a dozen in the fourth quarter of 2022.
In the VC market, the world's two largest technology VCs, Tiger Global and Softbank Vision Fund, have significantly reduced their investments. Tiger Global has significantly reduced the size of its new VC fund. As for the Softbank Vision Fund, it not only almost suspended investment, but also sold assets at a loss to return cash. On March 2, SoftBank Group reduced its holdings of SenseTime for the third time. This time, 9.79 million shares were reduced at a price of HK$2.5 per share. The cost price when SoftBank Group invested in the D+ round of SenseTime was about HK$3.2 per share. Therefore, Softbank endured a 30% net loss and forcibly reduced its holdings.
On the second day of the thunderstorm at Silicon Valley Bank, there were media reports that some depositors were trying to sell their deposits at a large discount to raise cash. It can be seen that everyone's cash flow is tight.
disappearing cash
Very different from the subprime mortgage crisis in 2007, Silicon Valley Bank’s thunderstorm was not due to any high-risk operations on the asset side. Everyone agrees that Silicon Valley Bank’s asset quality is good. That's why the Federal Reserve was able to pat its chest and guarantee that the bailout of Silicon Valley Bank will not require a penny from taxpayers. Silicon Valley Bank died from the sudden disappearance of cash.
To explain the reason for the thunderstorm at the Silicon Valley Bank, the following picture is enough.
2018-2022 Silicon Valley Bank net increase in deposits (unit: US$ 100 million)
The financial report shows that the net inflow of customer deposits of Silicon Valley Bank in 2019 was only US$12.4 billion, which will increase to US$40.2 billion in 2020, and further increase to US$78.2 billion in 2021. Silicon Valley Bank has doubled its deposits in the wake of the pandemic. By 2022, Silicon Valley Bank's deposits will suddenly drop to a net outflow of $16.1 billion.
Almost overnight, nearly $100 billion in cash disappeared.
Some people attributed the cause of the Silicon Valley Bank incident to a "huge public relations disaster", and the asset sale was misinterpreted by the market as a breakdown of funds, which led to a run on depositors. Some people also accused that the situation got out of control because some Silicon Valley VC bosses "irresponsibly" instructed the invested companies to withdraw their deposits.
But these are just the last straws. Behind the dramatic plunge in customer deposits at Silicon Valley Bank in 2022 is the rapid disappearance of cash in the entire US VC ecosystem. This is the grain of sand of the times that fell on Silicon Valley Bank.
Back in March 2020, the Federal Reserve held two emergency meetings in a panic and lowered interest rates to a historical low of 0-0.25%. A few months later, the torrent of currency began to pour into the VC ecosystem in the United States. According to NVCA data, in 2020, the amount of funds raised by VC funds in the United States increased by 17% year-on-year. In 2021, the amount of funds raised by VC funds in the United States will continue to grow by 46%, reaching an all-time high of US$1.3 trillion (NVCA data). Immediately afterwards, funds flowed from VC funds to start-up companies. In 2021, the scale of venture capital transactions initiated by American VCs worldwide will reach US$683 billion, which is double that of 2020 (NVCA data).
As a result, a VC boss called "the most profitable era in the past 20 years" has come.
Then, in 2022, this era of money everywhere came to an abrupt end. In 2022, the amount of VC funds raised in the United States will drop by 40%, returning to the level before the epidemic, and the corresponding amount of VC investment in the United States will also drop by 36% (NVCA data). Because of the sharp drop in the U.S. stock market, the exit of U.S. VCs has also dropped to a freezing point. In 2022, the total exit amount of U.S. VCs will only be US$71.4 billion, a year-on-year decrease of 90.5% (NVCA data).
To sum up, in 2022, US VC fundraising will be about 500 billion US dollars less, investment will be about 200 billion US dollars less, and LPs will get about 600 billion US dollars less in exit funds.
Therefore, to a certain extent, the collapse of the venture capital ecosystem led to the downfall of Silicon Valley Bank, not the other way around.
That means things are far from over with Silicon Valley Bank resuming withdrawals. Dalio, the founder of Bridgewater Fund, called the Silicon Valley Bank incident an alarm on March 14, believing that it will have a chain reaction in the entire VC field and even on a larger scale.
Fink, CEO of BlackRock, another Wall Street tycoon, said in a letter to investors on March 15 that the collapse of Silicon Valley Bank is just one of the dominoes, and the next domino to fall may be investment in private equity. Funds with illiquid assets such as real estate and real estate, especially those that use leverage to increase investment returns.
The 2023 version of the inversion: Market cap below cash
To get a glimpse of the leopard, let's look at a specific example.
Biotechnology is also one of the industries that Silicon Valley Bank focuses on serving. Of Silicon Valley bank deposits, 12% are in the healthcare and biotech industries. Silicon Valley Bank has said it will bank at least half of all venture capital-funded healthcare startups by 2022. Therefore, the decline in financing activities in the biotechnology industry is also one of the important reasons for the loss of deposits in Silicon Valley banks.
Among the biotechnology companies listed on the Hong Kong stock market, more than a dozen listed Silicon Valley Bank as one of the main banks. Bank deposits. With Silicon Valley Bank fully resuming withdrawals, these companies no longer have to worry about losing deposits.
Interestingly, although these companies all stated that the proportion of deposits in Silicon Valley Bank is not high, the proportion of their market capitalization is not low.
For example, Kunbo Medical announced that as of March 12, it held approximately US$11.8 million in deposits in Silicon Valley Bank, accounting for only 6.5% of the company's cash and cash equivalents. Therefore, Kunbo Medical said that the incident had little impact on the company's business plan. However, the conversion of US$11.8 million into Hong Kong dollars exceeds 90 million yuan, which is already equivalent to one-tenth of the current market value of Kunbo Medical.
According to this calculation, the market value of Kunbo Medical is already lower than the cash and cash equivalents on the company's account. The valuation inversion is also very serious - Kunbo Medical was valued at 4.7 billion yuan before listing, but its current market value is only 900 million Hong Kong dollars.
It is not only Kunbo Medical that is in a similar state. ChinaVenture found that the current market capitalization of biotechnology companies listed on the Hong Kong Stock Exchange 18a since 2021 is generally only a fraction of the pre-listing valuation. For example, the aforementioned Beihai Kangcheng was valued at 3.4 billion yuan before listing, but its current market value is only 850 million Hong Kong dollars; Baixinan was valued at 3 billion yuan before its listing, and its current market value is 1.1 billion Hong Kong dollars. This will obviously affect their refinancing. Looking at the financial reports of the "named" Hong Kong-listed biotech companies this time, their cash reserves will all decline in 2022. That's an even bigger danger for biotech companies that rely on financing transfusions.
It is hard to imagine, under such market conditions, how biotech companies in the primary market will raise funds, especially for late-stage companies.
An investor in the medical industry said bluntly to ChinaVenture that, given the current market conditions, the 18a Hong Kong stock market has basically lost its ability to raise funds. He said that companies that have listed earlier have ample cash reserves, but it is "more difficult" for companies that have not yet listed.
BA data shows that in 2022, the total amount of global biomedical investment and financing will decrease by about 38% year-on-year, and the total amount of medical device investment and financing will decrease by about 35% year-on-year. In contrast, the decline in financing in China's biotech track was even more dramatic. According to data from CVSource, compared with 2021, the number of financing events in China's medical and health industry has dropped by 38%, and the total amount has dropped by 54%, which has been cut in half.
Biotech start-ups are basically non-profit and non-revenue. In this era where cash is king, cash reserves are likely to directly determine whether a company can develop well or even survive.
The aforementioned investors believe that before the valuation system is repaired, it is difficult for the financing situation of the biotechnology track to fundamentally improve. In the current market, we can only maintain enough patience and confidence. For enterprises, his suggestion is to keep enough funds that can support them for three to five years, and "cut off the pipelines that should be cut decisively."