Employees stand outside the defunct Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

The sudden collapse of Silicon Valley Bank has thousands of tech startups wondering what now happens to their millions of dollars in deposits, money market investments and outstanding loans.

Most importantly, they are trying to figure out how to pay their employees.

“The number one question is, ‘How do you make payroll in the next few days,'” said Ryan Gilbert, founder of venture 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, fell apart this week and was shut down by regulators in the biggest bank failure since the financial crisis. The fallout began late Wednesday, when SVB said it sold $21 billion worth of securities at a loss and tried to raise cash. It turned into one total panic late Thursday, with the stock down 60% and tech executives scrambling to get their money out.

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 Federal Reservewith $209 billion in assets and over $175 billion in deposits.

But unlike a typical brick and mortar bank – Chase, American bank or Wells Fargo — SVB is designed to serve companies, with over half of its loans to venture funds and private equity firms and 9% to early and growth stage companies. Customers who turn to SVB for loans usually also keep their deposits with the bank.

The Federal Deposit Insurance Corporation, which became the beneficiary of SVB, insures $250,000 of deposits per customer. Since SVB mostly serves businesses, these limits don’t matter much. In December, roughly 95% of SVB’s deposits were uninsured, according to filings with the SEC.

There will be a lot of concern over SVB in the next few days, says FirstMark Capital's Rich Heitzmann

The FDIC said in a press release that insured depositors get access to their money by Monday morning at the latest.

But the process is much more complicated for uninsured depositors. They will receive a distribution within a week covering an unspecified amount of their money and a “receipt of receipt for the remaining amount of their uninsured funds.”

“As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the regulator said. Normally, the FDIC would place the assets and liabilities in the hands of another bank, but in this case it created a separate institution, the Deposit Insurance National Bank of Santa Clara (DINB), to handle insured deposits.

Customers with uninsured funds – anything over $250,000 – don’t know what to do. Gilbert said he advises portfolio companies individually, rather than sending out a mass email, because each situation is different. He said the universal interest is to meet the March 15 payroll.

Gilbert is also a limited partner in over 50 venture funds. On Thursday, he received several messages from companies regarding capital calls, or the money that investors in the funds send in when transactions take place.

“I got emails saying don’t send money to SVB, and if you’ve let us know,” Gilbert said.

Payroll processing concerns are more complex than simply accessing frozen funds, as many of these services are handled by third parties that worked with SVB.

Rippling, a back-office-focused startup, handles payroll services for many tech companies. On Friday morning, the company sent a message to customers saying that due to the SVB news it was moving “key elements of our payment infrastructure” to JPMorgan Chase.

“You must immediately inform your bank of an important change to the way Rippling charges your account,” the memo said. “If you do not make this update, your payments, including wages, will fail.”

Rippling CEO Parker Conrad said in a series of tweets Friday that some payments are being delayed amid the FDIC process.

“Our top priority is getting our clients’ employees paid as soon as we can, and we are diligently working toward that through all available channels, trying to learn what the FDIC takeover means for today’s payments,” Conrad wrote.

One founder, who asked to remain anonymous, told CNBC that everyone is climbing. He said he has talked to more than 30 other founders and talked to a CFO of a billion-dollar startup that has tried to move more than $45 million out of SVB without success. Another company with 250 employees told him that SVB has “all our cash”.

A spokesperson for SVB pointed back to CNBC FDIC statement when asked for a comment.

“Significant risk of infection”

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 quite familiar with the subject as well as SVB’s history. He used to work as a bank regulator in San Francisco.

Williams said the FDIC has always tried to work quickly and to make depositors whole, even if the money is uninsured. And according to SVB’s audited financials, the bank has access to cash – its assets are greater than its liabilities – so there is no apparent reason why customers should not be able to get the bulk of their funds back, he said.

“Banking regulators understand that not moving quickly to make SVB’s uninsured depositors whole would unleash a significant risk of contagion to the broader banking system,” Williams said.

Minister of Finance Janet Yellen on Friday, leaders from the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency met regarding the SVB meltdown. The Ministry of Finance said in a reading that Yellen “expressed full confidence in banking regulators to take appropriate action in response, noting that the banking system remains resilient and regulators have effective tools to deal with this type of event.”

On the ground in Silicon Valley, the process has been far from smooth. Some executives told CNBC that by sending in their wire transfer early Thursday, they were able to move their money. Others who took action later in the day are still waiting – in some cases for millions of dollars – and are unsure whether they will be able to meet their obligations in the near term.

Regardless of whether and how quickly they can get back up and running, companies will change the way they think about their banking partners, said Matt Brezina, partner at Ford Street Ventures and investor in startup bank Mercury.

Brezina said that after payroll, the biggest problem his company faces is accessing its debt facilities, especially for those in financial technology and labor markets.

“Companies will end up diversifying their bank accounts a lot more coming out of this,” Brezina said. “This is causing a lot of pain and headaches for a lot of founders right now. And it’s going to affect their employees and customers as well.”

SVB’s quick failure could also serve as a wake-up call to regulators about 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 its mid-quarter update, which began the downward spiral on Wednesday, SVB said it sold securities at a loss and raised capital as startup clients continued to burn through cash at a rapid clip despite the ongoing decline in fundraising. This meant that SVB struggled to maintain the required level of deposits.

Instead of holding on to SVB, startups saw the news as troublesome and decided to rush for the exits, a swarm that gained momentum as VCs instructed portfolio companies to get their money out. Williams said SVB’s risk profile was always a concern.

“It’s a concentrated bet on an industry that it’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 started in 1983 and according to written history, was created by co-founders Bill Biggerstaff and Robert Medearis during a poker game. Williams said the story is now more appropriate than ever.

“It started as a result of a poker game,” Williams said. “And that’s pretty much how it ended.”

— CNBC’s Lora Kolodny, Ashley Capoot and Rohan Goswami contributed to this report.

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