Here's why the collapse of Silicon Valley Bank is detrimental to startups and tech companies

Here’s why the collapse of Silicon Valley Bank is detrimental to startups and tech companies (Photo by NOAH BERGER / AFP)

Here’s why the collapse of Silicon Valley Bank is detrimental to startups and tech companies

  • Silicon Valley Bank shut down on March 10 after a run on the lender, with depositors pulling out as much as US$42 billion in a single day, rendering it insolvent.
  • Experts reckon the bank, which focuses on startups and tech companies, could have avoided what is dubbed the biggest US bank failure since the 2008 financial crisis.
  • The fallout is being felt worldwide as tens of billions of dollars frozen in SVB by startups and their private equity backers raise fears of a broader tech sector fallout.

On March 10, the go-to bank for United States (US) tech startups, Silicon Valley Bank, faced a sudden bank run and capital crisis. In a short period, the bank collapsed and was overtaken by federal regulators, leaving its valuable customers and investors in limbo. Since then, Silicon Valley Bank’s collapse has been causing collateral damage, sinking markets and delaying paychecks.

It started late last Wednesday (March 8) when the bank surprised investors with news that it needed to raise US$2.25 billion to shore up its balance sheet. Unfortunately, this was followed by the rapid collapse of a highly respected bank that had grown alongside its technology clients. “SVB was planning to raise US$2.25 billion across common shares, convertible preferred, and a commitment from General Atlantic in a deal run by Goldman Sachs Group Inc. to raise funds as technology startups facing a cash crunch yanked their funds,” Bloomberg reported.

Ironically, this was the second bank wind-down announced in the US last week. Silicon Valley Bank’s deposits grew from US$60 billion in 2020 to nearly US$200 billion two years later as the tech industry grew during the pandemic. The bank then invested in debts like US Treasuries and mortgage-backed securities.

The firm’s investments began to fall as the Federal Reserve increased interest rates to combat inflation over the last year. As a result, startup clients also started withdrawing deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising. That was when Silicon Valley Bank found itself short on capital. With that, it was forced to sell all of its available-for-sale bonds at a US$1.8 billion loss, the bank said late on Wednesday.

The sudden need for fresh capital by startups also came on the heels of the collapse of crypto-focused Silvergate bank, which sparked another wave of deposit withdrawals a day after the bank announced its fundraising plans. Venture capitalists were concerned that a bank run at SVB could pose an existential threat to startups that couldn’t tap their deposits. After all, experts reckon the ramifications could be far-reaching, with concerns that startups may be unable to pay employees in the coming days, and venture investors may struggle to raise funds.

By Thursday (March 9), customers of Silicon Valley Bank had withdrawn a staggering US$42 billion, according to a California regulatory filing. The filing also noted that by the close of business that day, Silicon Valley Bank had a negative cash balance of US$958 million and needed more collateral from other sources.

According to various reports, the bank’s shares continued to sink on Friday, and it ditched efforts to sell shares. Instead, Silicon Valley Bank was looking for a buyer, but the flight of deposits made the sale process harder, and that effort eventually failed too.

The bank run ended when California regulators intervened, shutting it down and placing it in receivership under the Federal Deposit Insurance Corporation. Many tech startups that remained with the bank face an uncertain timeline for retrieving their money, while insured deposits are expected to be available as early as today.

However, the lion’s share of deposits held by Silicon Valley Bank were uninsured, and it has yet to be determined when they will be freed up. The bank’s latest annual report indicates that 96% of its US$173 billion deposits were uninsured. “The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due,” the California financial regulator stated. “The bank is now insolvent.”

The price clients of Silicon Valley Bank are paying 

Since the fiasco began, tech leaders and investors worldwide have been engulfed, and scrambling to assess the potential ramifications because the tech industry heavily relies on US capital to supercharge growth. Even governments around the world have been taking swift action.

For instance, the US government on Sunday night (March 12) took extraordinary steps to stop a potential banking crisis by assuring all depositors. The Treasury Department, Federal Reserve, and FDIC announced measures to protect the bank’s customers and prevent additional bank runs. Under the plan, depositors at Silicon Valley Bank, including those whose holdings exceed the $250,000 insurance limit, can access their money starting today.

Elsewhere, companies from various countries have also been knee-deep in the bank’s collapse. In the UK, according to The Independent, a survey of 31 venture capital funds, which hold thousands of investments in UK tech and science firms, found that 34% of their portfolio companies – amounting to 336 – have accounts with the Silicon Valley bank. 

More than 200 of those now face short or long-term cash flow risk, The Independent added, citing data from BVCA – the industry body representing venture capital investors. By Monday morning (March 13), HSBC announced a rescue deal for Silicon Valley’s UK operations. “I said yesterday that we would look after our tech sector, and we have worked urgently to deliver that promise,” Chancellor Jeremy Hunt tweeted.

In essence, the move by HSBC provides a significant relief for tech companies, who feared an ‘existential threat’ to their businesses if they lost their funds at Silicon Valley Bank UK. The Bank of England highlighted that the deal with HSBC means the SVB UK will not be put into insolvency. Meanwhile, in Asia, India’s state minister for technology said over the weekend that he would meet startups this week to assess the impact of Silicon Valley Bank’s collapse on them. 

Rajeev Chandrasekhar tweeted that startups are an essential part of the New India economy, and he assured that the government would not let the crisis affect the growth of Indian startups. Separately, Y Combinator, an American technology startup accelerator that has invested in thousands of startups, including 200 from India, wrote a petition to US authorities.

The startup accelerator has some exposure to the troubled bank, so it wrote to the US Treasury Secretary, Janet Yellen, and others, stating that further shockwaves could lead to a financial crisis and layoffs of more than 100,000 workers, and asked them to prevent it. The petition, written by Garry Tan, CEO and President of Y Combinator, has already been signed by over 1,200 CEOs and founders representing more than 56,000 workers.

Tan, in the document, said that the startups would fail to have the cash to run payroll in the next 30 days. “By that measure, we can estimate that payroll-related furloughs or shutdowns will impact more than 10,000 small businesses and startups,” Tan added. According to data from the National Venture Capital Association (NVCA), Silicon Valley Bank has an estimated 37,000 small businesses with more than US$250,000 in deposits.

The petition said, “These balances are now unavailable to them, and without further intervention, according to the FDIC website, may be inaccessible for months to years.”