Silicon Valley, the brand, has been an ever-present over the last forty years. Prominently located in Santa Clara, Silicon Valley Bank is the bank that helped to sustain the tech ecosystem in San Francisco and across the world. Silicon Valley Bank (SVB), has been a going concern since 1983!
Last week things took a dramatic turn for the worse. Hundreds of startups and businesses across the world have been affected by what can only be described as a ‘bank run’.
In May 2021, Greg Becker, CEO of SVB, said he had “the best bank CEO job in the world, and maybe one of the best CEO jobs”. He added, at the time, how “the innovation economy is the best place to be”. Everything was looking fine until inflation and higher interest rates took their toll on the massive amount of long-term bonds that the bank was holding. These bonds are one of the reasons for losses that even in early 2023 commentators were worried might be unsustainable.
Last Wednesday Moody’s downgraded SVB. Even thought the bank was trying to shore up its balance sheet, taking losses by offloading a large portion of its bond investments.
Peter Thiel, amongst others, reacted by advising portfolio companies to pull money out of SVB as a precaution. The bank tried to calm customers who were getting worried. However, it clearly failed:
Was the Collapse of SVB avoidable?
By Friday morning the shares of SVB had collapsed by 60% and U.S. regulators became involved. By midday in New York, the California Department of Financial Protection and Innovation closed SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
The significance of the collapse is further highlighted as SVB is (was) the only publicly traded bank focused on Silicon Valley and new tech ventures. It was proud to do business with nearly half of all U.S. venture-backed tech and health-care companies. And almost forty percent of the UK StartUp ecosystem. Clients include Shopify and Andreesen Horowitz, as well as many others.
Today the hope is that a buyer will appear. However, as SVB is not a globally systemic bank, it is unlikely that there will be any help from the U.S. government. Leaving huge uncertainty for the many customers of the bank.
The situation hasn’t been helped by the closure of Silvergate Capital Corp., which owns Silvergate Bank. This was partially linked to the Silvergate Banks’ exposure to FTX. But also to the mounting pressure to reward savers who have been switching to banks offering higher rates. Something that could continue to affect the banking sector in the coming weeks and months.
What happened to Silvergate Bank?
One of the larger companies to be affected by the collapse of SVB is Circle Internet Financial Corp, which had $3.3 billion of reserves with the bank. This happened at the same time as the cyrpto-friendly Silvergate bank closed. Cutting access to its electronic payments platform that customers of Circle, Coinbase, Crypto.com, Gemini and others were heavily reliant on. Some of these smaller crypto businesses are now left without a bank account. In turn, exposing them to a number of risks. And to a dramatic rise in costs related to exchanging crypto to fiat.
Where SVB’s collapse was harder to predict, Silvergate had already suffered a $1 billion loss at the end of the fourth quarter of 2022. Institutions were better prepared for the shutdown and distanced themselves prior to the bank closing.
They didn’t have as much warning when it came to SVB. Albeit there was already talk of an extinction event for startups in February:
Mark Suster, a partner at Upfront, and an influential venture capitalist based out of California, has shared many more tweets since. Many of them highlight the challenges that many startup founders face today. Some of them are particularly moving.
Why this Extinction Event is a Global Problem
Gaining funding for your StartUp has been a very real challenge since the onset of inflation in late 2021. Valuations of unicorns across the world have been battered by economic storms. Which has now led the StartUp ecosystem to face an existential threat. An extinction event. One that many commentators say has put the entire sector back up to 10 years in its development.
The reverberations are being felt as far away as China:
SVB had served as a bridge between U.S. capital and Chinese tech entrepreneurs. In the UK, Prime Minister Rishi Sunak said today that the government is working “at pace” to ringfence the country’s technology and life sciences industries.
The UK tech sector is worried. An Open Letter has been sent to Jeremy Hunt, the UK Chancellor. Michael Moore, director general of the British Private Equity and Venture Capital Association said “Long-term support will be required to protect the UK’s innovators, entrepreneurs and funders.”
SVB had branches in Denmark, China, Germany, India, Israel and Sweden. All of them have been affected by the fallout. Canadian AcuityAds Holdings Inc. revealed on Saturday it had $55 million in deposits at SVB.
On Monday the full extent of the crisis will continue to unravel. In the meantime LinkedIn and Twitter feeds across the world continue to be full of comments about the second largest bank collapse in U.S. history.
What about the StartUp Founders?
One commentator shared on Twitter how the SVB collapse affects all of these Americans:
- startup employees in nearly every jurisdiction in the U.S.
- small business owners who use startup software
- law firms, accountants, customer service
- other regional banks around the country
This event will have far reaching affects on a truly huge amount of businesses and people:
When Monday morning comes, governments across the world need to move with a plan as soon as they can. The best minds in investment banking and venture capital will need to pool their resources in order to find the right solution. Not just a solution for the wealthy clients of SVB. But a solution to all the small businesses problems today.
Will they be up to the challenge?
Author: Andy Samu