The startup and venture capital scene is tense – especially in the U.S. Ever since it became known that Silicon Valley Bank (SVB) was in trouble and then went bankrupt, the nasty L-word has been haunting the sector. Is the sector having its Lehman Brothers moment?

The fact that it also affects startups and growth companies in Europe, but to a much smaller extent, is related to another L-word: local concentration. For decades, the Silicon Valley model of having almost all relevant investors and entrepreneurs concentrated in one region has been seen as crucial to the success of the U.S. tech sector. Certainly, startups get off the ground much faster when investors, lawyers, bankers, and founders are only a few minutes’ drive away from each other. No wonder people around the world are trying to copy the concept.

However, the collapse of Silicon Valley Bank is a vivid reminder of the downside of local concentration. When everyone is closely connected to each other, the collateral damage increases significantly. Last year, SVB said it counted nearly half of the venture capital-backed tech and life sciences companies in the U.S. to its clients. About 37,000 of these clients held 74% of the bank’s deposits in the days leading up to the collapse. In absolute terms, that is nearly $157 billion.

While SVB was also operating in Europe – in 2022, 18 percent of deposits came from international clients – it was nowhere near as deeply embedded in the local sector as in Silicon Valley. This is partly due to the fragmented nature of European markets. For years, Berlin, Paris and London have been competing for the title of startup capital of Europe. At the same time, smaller local hubs began to develop in every country – many of them focusing on specific sectors.

A player as important as Silicon Valley Bank will hardly grow in such an environment – with all the advantages and disadvantages it entails. The truth is that the bank’s success over the last nearly 40 years has been based on the fact that it was almost the only outside creditor for the start-up scene.

SVB’s collapse becoming a Lehman moment for the tech sector has become less likely after the state’s swift intervention. As for the impact of the bankruptcy, Europe’s startup economy benefits from its fragmentation. Therefore, the debt financing gap left by Silicon Valley Bank should ideally be filled by local players.