THE sudden collapse of Bank of Silicon Valley has thousands of tech startups wondering what now happens to their millions of dollars in deposits, money market investments, and outstanding loans.
More importantly, they are trying to figure out how to pay their employees.
“The number one question is, ‘How are you doing payroll in the next few days,'” said Ryan Gilbert, founder of venture capital firm Launchpad Capital. “No one has the answer.”
SVB, a 40-year-old bank known for handling deposits and loans for thousands of tech startups in Silicon Valley and beyond, collapsed this week and was shut down by regulators in the biggest bank failure since the financial crisis. The demise began on Wednesday night, when SVB said it was selling $21 billion in securities at a loss and trying to raise cash. He turned into a total panic Thursday night, with stocks down 60% and tech executives rushing to withdraw their funds.
Although bank failures are not entirely uncommon, SVB is a unique beast. It was the 16th largest bank by assets at the end of 2022, according to the Federal Reservewith $209 billion in assets and over $175 billion in deposits.
Employees stand outside the closed Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
However, unlike a typical brick and mortar bank – Chase, Bank of America Or Wells Fargo — SVB is designed to serve businesses, with more than half of its lending to venture capital funds and private equity firms and 9% to start-up and growth-stage companies. Customers who turn to SVB for loans also tend to store their deposits with the bank.
The Federal Deposit Insurance Corporation, which became SVB’s receiver, insures $250,000 in deposits per customer. Since SVB primarily serves businesses, these limits don’t mean much. As of December, about 95% of SVB’s deposits were uninsured, according to SEC filings.
The FDIC said in a Press release that insured depositors will have access to their money by Monday morning.
But the process is much more complicated for uninsured depositors. They will receive a dividend within the week covering an undetermined amount of their money and a “certificate of receivership for the remaining amount of their uninsured funds”.
“As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may flow to uninsured depositors,” the regulator said. Typically, the FDIC would entrust the assets and liabilities to another bank, but in this case it created a separate institution, the Santa Clara National Deposit Insurance Bank (DINB), to handle the deposits. insured.
Clients with unsecured funds — over $250,000 — don’t know what to do. Gilbert said he advises portfolio companies individually, instead of mass emailing, because every situation is different. He said the universal concern was to meet the payroll for March 15.
Gilbert is also a limited partner in more than 50 venture capital funds. Thursday, he received several messages from companies concerning calls for capital or the money that investors in the funds send as transactions occur.
“I got emails saying not to send money to SVB, and if you let us know,” Gilbert said.
Payroll concerns are more complex than simply accessing frozen funds, as many of these services are run by third parties who worked with SVB.
Rippling, a back-office-focused startup, manages payroll services for many tech companies. On Friday morning, the company sent a note to customers telling them that due to the SVB news, it was moving “key parts of our payment infrastructure” to JPMorgan Chase.
“You should notify your bank immediately of a material change in the way Rippling debits your account,” the memo reads. “If you don’t update, your payments, including payroll, will fail.”
Rippling CEO Parker Conrad said in a series of tweets Friday that some payments were being delayed as part of the FDIC process.
“Our top priority is to get our customers’ employees paid as soon as possible, and we are working diligently on this through all available channels, and trying to understand what the FDIC takeover means for today’s payments.” today,” Conrad wrote.
A founder, who asked to remain anonymous, told CNBC that everyone is scrambling. He said he spoke with more than 30 other founders and spoke to a CFO of a billion-dollar startup that tried to withdraw more than $45 million from SVB to no avail. Another company with 250 employees told him that SVB had “all our money”.
An SVB spokesperson referred CNBC to the FDIC Statement when asked for a comment.
“Significant risk of contagion”
For the FDIC, the immediate goal is to allay fears of systemic risk to the banking system, said Mark Williams, who teaches finance at Boston University. Williams is well versed in the subject as well as the history of SVB. He worked as a bank regulator in San Francisco.
Williams said the FDIC has always tried to work quickly and return depositors whole, even if the money isn’t insured. And according to SVB’s audited financial statements, the bank has cash – its assets outweigh its liabilities – so there’s no apparent reason customers can’t get most of their funds back, it said. -he declares.
“Banking regulators understand that failing to act quickly to make SVB’s uninsured depositors whole would trigger significant contagion risk for the entire banking system,” Williams said.
treasury secretary Janet Yellen met with leaders of the Federal Reserve, FDIC and Office of the Comptroller of the Currency on Friday regarding the collapse of the SVB. The Treasury Department said in a reading out loud that Yellen “expressed full confidence in banking regulators to take appropriate action in response and noted that the banking system remains resilient and that regulators have effective tools to deal with this type of event”.
On the ground in Silicon Valley, the process is far from smooth. Some executives told CNBC that by sending their wire transfer early Thursday, they managed to transfer their money. Others who took action later in the day are still waiting — in some cases millions of dollars — and unsure if they will be able to meet their short-term obligations.
Regardless of whether and how quickly they are able to get back up and running, companies will change the way they think about their banking partners, said Matt Brezina, a partner at Ford Street Ventures and an investor in start-up Mercury.
Brezina said that after payroll, the biggest issue his companies face is accessing their credit facilities, especially for those in fintech and labor markets.
“Companies are going to end up diversifying their bank accounts a lot more,” Brezina said. “It’s causing a lot of pain and headaches for a lot of founders right now. And it’s going to affect their employees and their customers as well.”
SVB’s rapid failure could also serve as a wake-up call for regulators when it comes to dealing with banks that are heavily concentrated in a particular industry, Williams said. He said SVB has always been overexposed to technology, even though it managed to survive the dot-com crash and the financial crisis.
In his mid-term update, which began the downward spiral on Wednesday, SVB said it was selling securities at a loss and raising capital because client startups continued to burn cash at a rapid rate despite the continued decline in fundraising. This meant that SVB struggled to maintain the necessary level of deposits.
Rather than stick with SVB, startups saw the news as inconvenient and decided to rush to the exits, a swarm that grew stronger as VCs have been instructed holding companies to get their money out. Williams said SVB’s risk profile was still a concern.
“It’s a focused bet on an industry that’s going to do well,” Williams said. “The liquidity event wouldn’t have happened if they weren’t so concentrated in their deposit base.”
SVB was launched in 1983 and, according to its written history, was designed by co-founders Bill Biggerstaff and Robert Medearis around a poker game. Williams said that story is now more appropriate than ever.
“It started as a result of a poker game,” Williams said. “And that’s kind of how it ended.”
– CNBC’s Lora Kolodny, Ashley Capoot and Rohan Goswami contributed to this report.