The surprise failure on Friday of Silicon Valley Bank – the biggest U.S. bank to fail since 2008 – has some marijuana finance experts warning that there are almost certain to be ripple effects for cannabis companies, even if the cannabis sector doesn’t take a direct hit from SVB going under.
Although SVB doesn’t appear to be a major repository of cannabis industry funds, it did bank at least some ancillary marijuana companies, said Morgan Paxhia, principal at San Francisco-based Poseidon.
And, Paxhia said, he believes the SVB failure is the tip of a financial iceberg, but the real bottom line for cannabis executives still isn’t clear yet.
“My takeaway is there are macro issues here. We’ve been dealing with a two-year bear market, recessionary kind of situation in our industry, but it feels like the rest of the world is starting to wake up,” Paxhia said.
“Think about what’s happened over the last few weeks: We’ve seen personal credit card balances hit new all-time highs, we’ve seen auto loan defaults picking up, we’ve seen commercial loans defaulting. You’re starting to see weakness in the system.”
Paxhia pointed to the failure Friday of Signature Bank, which followed SVB’s demise. Then on Monday, news broke that California bank First Republic appears to be on the brink of following Signature and SVB.
In addition, banking firm Charles Schwab took a major stock hit Monday due to investor fears over SVB and Signature.
“It’s already far beyond (SVB), and I think it’s too cute to say it’s contained,” Paxhia said. “I don’t think we’re done. We’re not going to know for a while.”
But it’s quite possible the situation could worsen and result in some mid-level banks also failing, he said. From what he’s seen so far, Paxhia thinks small credit unions are still on solid footing, which to him is a relief because that’s a source of financial services for a lot of the marijuana sector.
The real concern is the big picture uncertainty about the economy and the health of financial institutions.
“If we’re at record low unemployment and banks are blowing up, what happens when we even see a normalization of the unemployment rate? What’s that going to do to depositors nationwide?” he asked.
“Things are just getting heavier on a macro basis,” Paxhia said.
It’s also quite likely that the entire situation will cause investors and other financial institutions to clamp down in the near-term, which may very well make fundraising even harder, said Bryan Miller, executive investment director at Florida-based Rair Capital.
“Whenever there’s a shock to capital markets, people are more guarded in how they conduct their business. They start to become more conscientious of new risks that maybe they were less concerned about previously, after seeing an event like this occur,” Miller said.
At the very least, it’ll make life tougher for less-capitalized operators that are trying to raise money, while bigger companies likely will be able to weather the storm.
“Venture-level companies that are experiencing balance sheet risk will face setbacks in the immediate term,” Miller said. “The companies that sit at the top in the venture-backed ecosystem, they’re probably going to be OK, but the ones near the bottom, they’re going to struggle more.”
“At the end of the day, a company can seek capital and a company can lend capital; it’s just a question of the cost of that capital. Capital is also becoming more and more expensive right now,” Miller said.
That doesn’t mean cannabis capital has been choked off, though. Miller emphasized that his firm works with many non-bank lenders that have a cannabis focus.
The real question is still whether there’s more pain on the way for the U.S. financial system or if the problem can be controlled, both Miller and Paxhia said. Either way, cannabis executives should keep a close eye on the larger situation so they can adapt accordingly.
“The capital markets industry just got bruised. Does this turn into a bigger animal? I don’t know. I wish I had a crystal ball,” Miller said.