The sudden collapse belong to Silicon Valley Bank there are thousands of tech startups wondering what will happen to their millions of dollars in deposits, money market investments, and outstanding loans.
Most importantly, they are trying to find a way to pay their employees.
Ryan Gilbert, founder of venture capital firm Launchpad Capital, said: “The number one question is, ‘How do you get paid in the next few days. “No one has an answer.”
SVB, a 40-year-old bank known for handling deposits and loans to thousands of tech startups in Silicon Valley and beyond, disbanded this week and was shut down by regulators in the biggest bank bust since the financial crisis. The fall began late Wednesday, when SVB said it was selling at a loss of $21 billion in securities and trying to raise money. It turns into a total panic late on Thursday, with stocks down 60% and tech executives racing to cash in on their cash.
While bank failures are not uncommon, SVB is a unique monster. It is the 16th largest bank by assets at the end of 2022, according to the report 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 | beautiful pictures
However, unlike a typical traditional bank — Chase, american bank or Wells Fargo — SVB is designed to serve businesses, with more than half of the loans going to venture capital funds and private equity firms and 9% going to early- and early-stage companies growth. Customers looking to SVB for loans also tend to deposit money in banks.
The Federal Deposit Insurance Corporation, which became an SVB recipient, guarantees $250,000 in deposits per customer. Since SVB caters primarily to businesses, those limits don’t make much sense. As of December, about 95% of SVB’s deposits were uninsured, according to filings with the SEC.
FDIC said in a Press Release that insured depositors will have access to their funds on Monday morning.
But the process is much more complicated for uninsured depositors. They will receive a dividend within a week consisting of an unspecified amount and a “certificate for the remainder of their uninsured funds.”
“When the FDIC sells Silicon Valley Bank assets, future dividend payments may be made to uninsured depositors,” the regulator said. Normally, the FDIC would put assets and liabilities in the hands of another bank, but in this case, the FDIC established a separate organization, the Santa Clara National Deposit Insurance Bank (DINB), to manage the deposits. insured deposit.
Customers with uninsured amounts — over $250,000 — don’t know what to do. Gilbert said he is advising each company in his portfolio, rather than sending out mass emails, because every situation is different. He said the common concern is meeting payrolls for March 15.
Gilbert is also a limited partner of more than 50 venture capital funds. On Thursday, he received several messages from companies regarding capital calls or the amount of money that investors in the fund sent in when the transaction took place.
“I got an email saying don’t send money to SVB, and if you did let us know,” said Gilbert.
Payroll concerns are much more complicated than just accessing frozen funds, because many of those services are handled by third parties that already work with SVB.
Ripple, a back-office-focused startup, handles payroll services for many tech companies. On Friday morning, the company sent out a note to customers telling them that, because of the SVB news, it was moving “key elements of our payments infrastructure” to JPMorgan Chase.
“You should immediately notify your bank of a material change to the way Ripple debits your account,” the memo said. “If you don’t make this update, your payments, including payroll, will fail.”
Ripple CEO Parker Conrad said in a series of tweets on Friday that some payments are being delayed during the FDIC process.
Conrad writes: “Our first priority is to pay our customers’ employees as soon as possible, and we’re working towards that across all available channels and trying to understand what it means to get paid. FDIC takeover for today’s payments”.
One founder, who requested anonymity, told CNBC that people are scrambling. He says he’s spoken to more than 30 other founders and spoke to a CFO of a multi-billion dollar startup who managed to move more than $45 million out of SVB with no results. Another company with 250 employees told him that SVB had “all of our cash”.
SVB spokesperson pointed CNBC back FDIC’s statement when asked to comment.
‘Significant risk of infection’
For the FDIC, the immediate goal is to quell concerns about systemic risks to the banking system, he said. Mark William, who teaches finance at Boston University. Williams is quite familiar with the subject as well as the history of SVB. He used to work as a bank manager in San Francisco.
Williams said the FDIC always tries to work quickly and keep depositors safe, even if the money is not insured. And according to SVB’s audited financial statements, the bank has cash on hand — its assets are larger than its liabilities — so there’s no obvious reason why customers can’t get most of their money back. their money, he said.
“Bank regulators understand that failure to act quickly to protect SVB’s entire uninsured depositor will pose significant contagion risk to the broader banking system,” Williams said. than.
Finance Minister Janet Yellen on Friday met with the leaders of the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency regarding the SVB crisis. Ministry of Finance said in a read aloud that Yellen “expressed full confidence that banking regulators will take appropriate actions to respond and noted that the banking system remains resilient and that regulators have the right effective tool to deal with this type of event.”
On the ground in Silicon Valley, the process has not been smooth. Several executives told CNBC that, by sending wire transfers early on Thursday, they were able to successfully transfer the funds. Others who acted later in the day are still waiting — in some cases, with millions of dollars — and unsure if they will be able to meet their short-term obligations.
Regardless of how quickly they can get back up and running, companies will change the way they think about it, said Matt Brezina, a partner at Ford Street Ventures and investor in startup bank Mercury. its banking partners.
Brezina said that after pay, the biggest problem his companies face is accessing their debt bases, especially for those in the financial technology and labor market sectors. .
“Companies will eventually diversify their bank accounts further from this,” says Brezina. “This is causing a lot of difficulties and headaches for a lot of founders right now. And it’s going to affect their employees and customers as well.”
The rapid failure of SVB could also be a wake-up call for regulators, Williams said, to deal with banks that are heavily focused on a particular industry. He said that SVB has always been overexposed to technology even though it managed to survive the dot-com crash and financial crisis.
In it mid-quarter update, which started a downward spiral on Wednesday, SVB said it is selling at a loss and raising capital as its startup clients are continuing to burn cash at a dizzying pace despite a steady decline in fundraising. reduce. That means SVB is struggling to maintain the required deposit levels.
Instead of sticking with SVB, the startups treated the news as trouble and decided to rush to the exits, a swarm that has gained strength like VC tutorial portfolio companies to get their money out. Williams said SVB’s risk profile is always a concern.
“It’s a bet focused on an industry where it’s going to do well,” Williams said. “The liquidity event wouldn’t have happened if they weren’t so focused on their deposit base.”
SVB was started in 1983 and, according to it written history, was conceived by co-founders Bill Biggerstaff and Robert Medearis over a game of poker. Williams says that story is more relevant now than ever.
“It started as a result of a game of poker,” Williams said. “And that’s how it ended.”
— Lora Kolodny, Ashley Capoot and Rohan Goswami of CNBC contributed to this report.
