A weekend like no other: Silicon Valley Bank’s failure threatens startup economy

For those of us who live in the innovation and startup world, these past 72 hours have been like no other. It all started late last week when CEO Greg Becker of Silicon Valley Bank (SVB is the 16th largest American bank based on assets) held an emergency investor call to share his plans to address the bank’s need to raise additional equity and increase liquidity to address their customers’ cash withdrawals. SVB’s assets ballooned the past several years in step with the massive inflow of tech and venture capital so they made long term investments in bonds and mortgage backed securities that had fixed yields. Those yields dropped significantly in value as the Fed aggressively raised interest rates. These positions wouldn’t have been a major issue if new cash from IPOs and new venture funds had flowed in (which hasn’t happened) and their customer base didn’t need to access cash to sustain their operations. In particular, Becker told his customers, “We have been supporting you and your startups for 30 years. We now ask you not to panic.” These are words you never want to hear from a bank CEO. 

This precipitated a run on the bank and just 24 hours later the FDIC had taken control of the bank and moved all the remaining deposits to a new bank: the National Bank of Santa Clara. As part of this move, the FDIC announced they were freezing future withdrawals beyond the $250k FDIC insurance maximum. While that might seem like a lot of money for an individual, for a specialized business bank like SVB who serves the startup and venture capital industry, this would leave almost 90% of their ~$180Bn in deposits exposed and unavailable. High growth startups typically raise large amounts of venture capital to support their “burn rate” which can run into millions of dollars per month, so having access to only $250k is catastrophic, likely forcing mass layoffs and business closures. 

As you probably know, the non-profit that I lead, the Alliance for SoCal Innovation, is dedicated to elevating the SoCal region as a center of innovation, technology and entrepreneurship. SVB was a founding partner of the Alliance and the initial lead sponsor of our SoCal Venture Pipeline Program though they stopped actively supporting our work just over a year ago. SVB has played the lead role in supporting and promoting the startup and venture community for decades. At the Alliance, we have >100 local venture capital partners in our investor network that serve hundreds of SoCal startups employing thousands across the region. The people most impacted by the meltdown of SVB are entrepreneurs who started companies and are working incredibly hard to build something new in the world. Given that SVB serves a staggering ~50% of all venture-backed startups, we naturally have a large number of impacted companies locally and across the SoCal region. I personally know many struggled to make payroll on Friday when their funds got locked up by the FDIC. 

I think Paolo Pirjanian, CEO of Embodied, captured it well in his recent LinkedIn post, “This year’s curveball is the situation with SVB. Tough to have your most recent series C [of venture funding] be frozen in an account you cannot access.”

The issue here is not “big tech” of Silicon Valley but entrepreneurial, small business owners and founders who rationally believed their company’s operating capital would be accessible in a trusted, secure bank like SVB. Suddenly on Friday, for many of them, their funds were inaccessible. There was an incredible groundswell in the startup and venture communities to support these distressed founders, but this crisis required swift and bold policy action necessary to make sure a short-term challenge didn’t become a long-term nightmare for these startup companies and for the economy as whole. 

In particular, it was vitally important to ensure that critical payroll dollars and working capital these firms have at SVB isn’t held hostage, impacting not only the thousands of employees at these startup but also the many thousands of people in other industries that have startups as  clients such as creative services, HR and IT providers, facilities and equipment providers, etc. Given the 5x job multiplier for tech jobs, these ripple effects would go far beyond tech potentially creating a broader economic contagion.

Though my bias is generally toward allowing free markets to self-correct, given the potential devastation to an important part of our economy and the broader risk to our financial system, I vocally called for the Feds to take immediate additional action to protect the full value of customers’ deposits. I joined the legions in the innovation community in their urgent efforts to reach out and educate key policymakers. 

Fortunately, in a bold and necessary move, they did exactly that – not only for SVB but also for Signature Bank (29th largest bank with ~$110Bn in assets). The collective sigh of relief on Sunday afternoon was palpable! It should be noted that this move does not include a bailout of shareholders or bondholders of either institution. I believe relevant SVB executives should be held accountable for what seems to be a failing in banking 101 (matching investment duration with likely customer liquidity needs). 

Aaron Fyke, Founder and Managing Partner of Thin Line Capital, a Pasadena-based venture capital firm that invests in clean energy technology companies, said “This has been an exhausting 48 hours. The banking system runs on confidence and trust. Small businesses need to focus on growing their business, not being worried if their bank will fail. In this particular case, thousands of companies, with tens of thousands of employees, didn’t know if they would be able to access their funds in time to make payroll. Swift action was needed, so this was a welcome announcement for startups while restoring confidence in the broader banking system. One of my founders broke down crying upon hearing the news, because this meant he wasn’t facing mass layoffs in a couple of days.”

I suspect we will see additional fallout from this crisis (we are seeing a bit of that in market volatility with SVB peer banks including First Republic, PacWest and Western Alliance), but I am hopeful that bold action by the Fed has averted what could have been a spiraling catastrophe. These past 72 hours have indeed been a nail-biter.

[Note: a version of this article was published earlier today in PasadenaNow]