MSIM Sunday Reading is a weekly publication highlighting a current and relevant topic chosen by a professor of the Master of Science in International Management for their courses. The Franklin community gets an inside look at the coursework and specializations offered at MSIM and expert commentary on international issues affecting our world today. This week's MSIM Sunday Reading is in conversation with David Suleiman, Assistant Professor of Finance at Franklin. His article addresses how the failure of a Bay-area bank, Silicon Valley Bank, has affected startups, a topic addressed in his Advanced Corporate Finance course.
David Suleiman is Assistant Professor of Finance at Franklin University Switzerland. He completed his undergraduate studies in International Economics and Management at Bocconi University and obtained a PhD in Finance from Louisiana State University in 2020. During his time at LSU, Professor Suleiman taught a variety of courses including courses in Financial Markets and Institutions, Investments, and Principles of Finance. He received a teaching award in 2019. At Franklin, he has been teaching courses in Managerial Finance, Advanced Corporate Finance, Personal Finance, Financial Markets and Institutions, Portfolio Analysis and Asset Management, Fintech and Digital Finance. In May 2023, he received the FUS teaching award. His research focuses on corporate finance issues. In particular, he studies the impact of banking relationships on corporate client firms.
Earlier this year, the 16th largest bank in the United States, Silicon Valley Bank, failed and their assets and liabilities were acquired by First Citizens Bank. This sparked the fear of a new financial crisis in the United States (Roose, 2023). Silicon Valley Bank was a specialized lender, a so-called venture debt provider, which played a very important role in providing loans to early-stage tech firms since lending to such firms is often too risky for traditional banks. In particular, venture debt is provided in collaboration with venture capital and by establishing a close relationship with the borrower, and it is often the only way for startups to obtain debt financing (Ibrahim, 2010; Rassenfosse & Fischer, 2016). In addition, several academic papers have documented the positive impact of venture debt on the development of startups (see i.e.: Davis, Morse & Wang, 2020; Krause, Block & Moritz, 2021).
What are the implications for startups of this development in the venture debt market? How can business leaders react to such developments and protect themselves from such a negative shock to the supply of capital? These are only a few of the questions that will be discussed in the Advanced Corporate Finance course (MGT 545) in the MSIM program at Franklin University Switzerland. It is still too early to tell the exact outcome of the failure of Silicon Valley Bank, but the difficult current macroeconomic environment with high interest rates coupled with the failure of the largest venture debt provider will probably make it more difficult for early-stage tech firms to obtain capital needed to finance their investment opportunities. This development will slow the growth of firms in the tech sector and hamper tech development. Moreover, cash management will become more complex since startups may want to spread their cash holdings among different banks in order to reduce risk. Finally, venture capitalists may reduce the amount of money invested in startups. As a result, the job of a CFO in a startup will become more important. (Gompers, 2023)
Grounded in economic theory, the Advanced Corporate Finance course will teach students the foundations of corporate finance with a special emphasis on the importance of the supply of capital to firms. Firms rely on well-functioning financial markets and institutions to raise funds to invest in profitable projects that generate growth. However, information asymmetries between borrowers and lenders can prevent the flow of capital to profitable investment opportunities (Stiglitz and Weiss, 1981). Information asymmetries are present in young firms such as startups which have high capital needs and thus, they rely heavily on financial institutions such as venture debt lenders to provide external capital. As a result, it is of utmost importance that future business leaders have an in-depth understanding of the complex nature of financial markets and institutions and the role they play in the development of firms.
Davis, Jesse, Adair Morse, and Xinxin Wang. The Leveraging of Silicon Valley. No. w27591. National Bureau of Economic Research, 2020.
De Rassenfosse, Gaétan, and Timo Fischer. "Venture Debt Financing: Determinants of the Lending Decision." Strategic Entrepreneurship Journal 10.3 (2016): 235-256.
Gompers, Paul. "Silicon Valley Bank’s Focus on Startups Was a Double-edged Sword." Harvard Business Review Online, 17 Mar 2023.
Ibrahim, Darian M. "Debt as Venture Capital." University of Illinois Law Review, (2010): 1169.
Krause, Carlos, Jörn Block, and Alexandra Moritz. "Venture Debt Financing and the Development of Startups: Disentangling Treatment from Selection Effects.” Entfin.org, 2021.
Roose, Kevin. “3 Lessons from Silicon Valley Bank’s Failure.” The New York Times, 11 Mar 2023.
Stiglitz, Joseph E., and Andrew Weiss. "Credit Rationing in Markets with Imperfect Information." The American Economic Review, 71.3 (1981): 393-410.