Venture capitalists and technology executives are scrambling to understand and account for the potential repercussions of the sudden implosion of Silicon Valley Bank on Friday.
The Federal Deposit Insurance Corporation, or FDIC, said Friday that US federal regulators shut down Silicon Valley Bankthe Prime Minister financial institution for Silicon Valley tech startups for the past 40 years. SVB’s collapse represents the biggest bank failure since the 2008 global financial crisis.
Many venture capital investors and technology executives expressed shock to CNBC, and some compared SVB’s debacle to Lehman Brothers, which filed for bankruptcy in 2008. Many of the investors and executives requested anonymity when discussing issues that could affect their companies and employees.
The general opinion is that SVB did a poor job of communicating to customers when that notified On Wednesday, it was set to raise $500 million from venture capital firm General Atlantic while offloading roughly $21 billion worth of holdings at a loss of $1.8 billion. One VC said that SVB announcing it was raising money while essentially saying everything is “fine” seemed to trigger people’s memories of Lehman Brothers, which they remember acting similarly at the time.
“So, unfortunately, they repeated the mistakes of history, and everyone who lived through that period said, ‘Hey, they might not be well, we learned that last time,'” the VC said.
SVB tried to allay fears that it was financially unsound as late as Thursday evening.
Nikolas Kokovlis | Nurphoto | Getty Images
In an email SVB sent to a client, a copy of which was obtained by CNBC, the bank characterized rumors of its problems as “buzz about SVB in the markets” and sought to reassure the client that it was “launching a series of strategic actions to strengthen our financial position, improve profitability and improve financial flexibility now and in the future.”
“It is business as usual at SVB,” the bank said in the email to startups. It added toward the end of the email, “In addition, we have a 40-year history of navigating bear and bull markets and have developed leading risk mitigation capabilities to ensure our long-term financial health.”
Another venture capitalist said a representative from SVB called their agency on Thursday to allay their fears but that the agency’s CFO “didn’t find it reassuring, to say the least.”
However, one tech executive was sympathetic to the bank’s plight, asking: “What message would ever reassure you that your money is safe when other people are telling you there’s a fraud going on? There is no message, because it’s not about messages.” That’s the Prisoner’s Dilemma thing … Everyone at that moment now has to try to imagine what everyone else is going to do.”
When asked for comment, an SVB representative referred CNBC back to the FDIC announcement, adding, “The FDIC will share additional information as it becomes available.”
“A Twitter-led bank run”
Several venture capitalists quickly told their portfolio companies to move money from Silicon Valley Bank to other banks, including Merrill Lynch, First Republic and JP Morgan, so they could pay their employees on time next week.
An AI startup executive said the company’s CFO was quick to handle the situation and that it had enough cash to pay employees on time. Still, SVB’s collapse left a bad taste in the mouth of the boss, who said the bank’s collapse feels like “unnecessary hysteria.”
“It disappoints me about our ecosystem,” the startup CEO said.
Many venture capitalists echoed the startup CEO’s view that the SVB collapse felt like a self-fulfilling prophecy created by unnecessary panic. Some likened it to a “Twitter-led bank run,” as the tech community took to social media to spread information, and often panic. A prominent tech CEO told CNBC that many startup founders used Twitter and Metas communication service WhatsApp to send quick updates to each other.
One venture capitalist said it was as if someone shouted “fire in a crowded theater where there is no fire.”
“And then as everyone rushes to the door, they knock over the oil lamp and it catches fire and it burns the building down,” the venture capitalist said. “And then that same person (stands) outside and says, ‘See, I told you so.’
As panic spread and the FDIC stepped in, companies with locked-in funds reported problems getting cash out and making payroll.
One startup founder told CNBC that “everyone distorts.” He said he has spoken to more than 30 other founders and that both large and small businesses are affected.
The founder added that a CFO from a unicorn startup has tried to move more than $45 million out of SVB without success. Another company with 250 employees told the founder that SVB has “all our cash”.
Another founder said her company’s payroll provider moved from SVB to another bank on Thursday, which meant payroll was not run for employees as scheduled Friday morning. She said she has been over-communicating with employees to ease their concerns as much as possible, and she expects the payroll to be out by the end of Friday.
If it doesn’t, the company plans to plug employees who need immediate spot coverage into the funds directly, according to an internal memo seen by CNBC.
“A lot of people live down to the dollar when it comes to budgeting, and they can’t afford a 24-hour delay in their payroll,” the founder said.
Payroll provider Rippling notified some customers on Friday that their payments would be delayed due to the bank’s “unexpected solvency challenges”, CEO Parker Conrad wrote in a tweet. The company accelerated a plan to switch from SVB to JPMorgan Chase but not in time to avoid stopped payments.
Aaron Rubin, CEO of e-commerce logistics startup ShipHero, said he had to manually pay some employees on Friday because his company relies on Rippling for payroll services.
“We found out this morning that nobody got paid,” he said. “We started manually paying our warehouse workers because we didn’t have time to manually send payments to everyone.”
Warehouse staff make up about a third of ShipHero’s 600-person staff, Rubin said. Remaining staff, which mostly include customer service and technical staff, will be paid next week.
“Our concern is for the longer term,” Rubin added. “Could some of our customers have liquidity problems? I don’t think we know these ripple effects yet. Are we going to have problems getting paid from our customers because they’re going to have problems?”
On Thursday, Jean Yang, the founder and CEO of surveillance company Akita, tried to complete an electronic bank transfer to ensure she could pay the wages of her team of seven, but she found she could not make that type of transaction at the time. She drove to the SVB location on Sand Hill Road in Menlo Park, a street populated by venture capital offices.
There she asked a cash account for a bank transfer and was told that the branch could not do it. So she asked for a $1 million cashier’s check. After 20 or 25 minutes the bank handed it over.
Others in line withdrew their entire balance. “I regret not withdrawing our full balance now,” she said.
On Friday, Yang returned to the Silicon Valley Bank branch 15 minutes before it opened to remove the remaining money. A line of about 40 people had formed. Gossip spread among those waiting. One person displayed a tweet on their phone suggesting that bank employees had been instructed not to come to work. (Reuters reported on a company memo about this.)
Then an employee came out of the office and offered about 15 copies of an article from the FDIC about the agency’s response to the bank’s situation. The line disbanded as people realized the bank’s fate.
Later Friday, one of the startup’s investors called Yang and offered to help Akita make payroll, she said. “My hope is that the government saves people over $250,000,” she said. “I know people with tens of millions, hundreds of millions (of dollars) with SVB. I think if they only get $250,000, their business will be wiped out.”
“Now everyone is waiting to see when the treasury will come in,” another venture investor said. “Hopefully (California Gov.) Gavin Newsom calls Biden right now and says, ‘This is systemic in our area, but you can see the ripple effects on other banks and their stocks and their bonds.’ If it’s systemic, I think the Treasury will step in like 2007 and ’08 and protect the money market accounts, plus will protect the depositor.”
This person added, “If they don’t go in, then people will assume that money is lost. It will have huge consequences for the business environment.”