“Stay calm.”
That’s what Greg Becker, CEO of Silicon Valley Bank, told clients Thursday morning on a conference call who hurriedly called to reassure them that the Santa Clara institution is confident it will weather a liquidity crunch.
At the end of the day, when high-profile venture capital firms asked their portfolio companies to raise their money, the bank saw $42 billion in withdrawals. It was an outright bank run, a coup against one of the technology industry’s central institutions, fueled by some of the loudest drivers. The second largest bank failure in US history, following the 2008 collapse of Washington Mutual, raised the specter of widespread layoffs at start-ups and wider instability in the US financial system.
The founder of the tech company, Sara Mauskopf, was almost part of that rush to the exits. When she wanted to transfer a small amount from her account on Thursday, the bank was closed for a day. The deal was pending Friday morning when the California Department of Financial Protection and Innovation closed SVB and sold its assets to the Federal Deposit Insurance Corp.
“I didn’t expect that at all,” said Mauskopf.
Numerous companies across the country have finances that are intertwined in some way with the SVB, including loans and cash flow accounts. The bank, which focuses on technology, venture capital and private equity firms, had about $209 billion in assets at the end of last year, according to the Federal Reserve, making it the 16th largest in the United States.
Now these companies must eagerly await if and when they will be able to recover funds above the $250,000 limit guaranteed by the FDIC, a scenario that may require further government intervention.
Mauskopf, founder of childcare company Winnie, said she has been working with SVB since starting her business in 2016. She did not have access to the money she needed to run her business, including payroll.
“If you can’t guarantee that employees are paid on time, it really hits people,” says Mauskopf.
Companies that do not have a direct bank account with the SVB can also face obstacles in paying employees due to their bankruptcy. Rippling, a human resources management company, used the bank to run its payroll, CEO Parker Conrad wrote Twitter. It has since moved to JPMorgan Chase & Co. switched, but payments that started earlier in the week could be delayed, Conrad said.
SVB’s problems stem from the sharp rise in interest rates that started last year, which reduced the profitability of its large bond position. The acute phase of the crisis began on Wednesday, when the company sold a large chunk of its securities for a loss of about $1.8 billion. As stocks fell in response to the news, customers felt financial weakness and began to withdraw their money take to buy to avoid losses.
The FDIC said all depositors will have full access to their insured deposits by Monday. However, according to the bank’s annual report, only 12.5% of its $173.1 billion in deposits were insured at the end of 2022.
Jessica Mah, who founded the inDinero accounting software company, said she has many clients with SVB accounts, including one with just $100 million in deposits there. Some business owners are considering financing payroll personally if they don’t have access to capital by then, Mah said.
Uninsured depositors will receive proof of trusteeship for the remaining amount of their uninsured funds, which can be repaid in the future if the FDIC liquidates the assets of the SVB.
It is possible that the Confederation will intervene in advance to guarantee all SVB balances, for fear that other banks will become infected. Mauskopf said it’s not about whether “wealthy VC [venture capital] Funds earn a kind of bailout,” but whether companies can use the money they earn to pay their bills.
“I just want to make sure people understand that this has a real impact on real people who aren’t rich,” she said.
Some financial services firms that focus on startups, including Stripe and Brex, provide funding to companies such as Mauskopf’s.
Brex is offering a third-party funded emergency bridging line of credit for SVB customers, the company wrote on its website, Mauskopf said, and Stripe is offering a cash advance on future earnings.
A tech founder in Los Angeles said he wasted no time transferring money from SVB when he heard about the stock drop and was able to recover 85% of his company’s money even though his company still has millions of dollars left in SVB. .
He also invests in startups through AngelList, a major platform for launching venture capital funds. Because AngelList banks with the SVB, the assets AngelList has at its disposal are also frozen.
While many observers agree that SVB could probably have weathered the liquidity crunch if customers hadn’t suddenly tried to withdraw their deposits, there’s no reason for people to show patience, the tech founder said.
“There’s no reason to keep your money there because the downside risk, even if it’s 0.1%, is that you lose all your money,” he said. “I just don’t want to be among the last.”
William Hsu is a co-founder of LA-based venture capital firm Mucker Capital, which has hundreds of portfolio companies affiliated with SVB Bank. Hsu said he was concerned about the potential impact of the bank’s collapse on venture capital, technology and startups in the coming weeks and months.
“I am very concerned about my portfolio companies and how they are going to do their payroll. I am very concerned about the people who work for my companies,” he said.
There are also legal ramifications for not paying employees, which can lead to mass layoffs when companies reluctantly fire employees.
Hsu is looking for other sources of capital not tied to the SVB to bridge his businesses for the next paycheck.
Friday’s events are also likely to hurt business for months as the businesses it supports struggle to stay afloat, Hsu said.
“That’s a lot of capital that is no longer flowing into the economy,” he said.
Lindsay Blakely, a Times contributor, contributed to this report.
Source: LA Times