Venture capitalists and technology executives are scrambling to understand and explain the potential impact of Friday’s sudden Silicon Valley bank implosion.
The Federal Deposit Insurance Corporation (FDIC) said Friday that US federal regulators have shut down Silicon Valley Bank, the leading financial institution for tech startups in Silicon Valley for 40 years. The collapse of the SVB is the biggest bank failure since the Great Depression of 2008.
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Scores of venture investors and technology executives expressed shock to CNBC, with some comparing SVB’s debacle to that of Lehman Brothers, which filed for bankruptcy in 2008. Many of the investors and executives asked not to be identified as they discussed matters that could affect their companies and employees.
The general consensus is that SVB did a poor job of communicating with clients when it announced Wednesday it was raising $500 million from venture firm General Atlantic while also owning around $21 billion in equity would sell at a loss of $1.8 billion. One VC said that SVB’s announcement of raising money while essentially saying everything was “fine” seemed to bring back people’s memories of Lehman Brothers, which they remember being similar to at the time have acted.
“So, unfortunately, they repeated mistakes throughout history, and everyone who lived through that period said, ‘Hey, maybe they’re not okay; that’s what we were told last time,'” the VC said.
On Thursday evening, the SVB tried to allay fears of being financially stricken.
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In an email SVB sent to a client, a copy obtained from CNBC, the bank characterized the rumors of their troubles as “a hype about SVB in the markets” and tried to reassure the client that they ” has initiated a number of strategic actions to strengthen our financial position, improve profitability and improve financial flexibility now and in the future.”
“Everything is going as usual at SVB,” says the email to the startups. At the end of the email, it added: “Additionally, we have a 40-year history of navigating bear and bull markets and have developed leading risk mitigation skills to ensure our long-term financial health.”
Another venture capitalist said an SVB representative called his firm on Thursday to allay their concerns, but that the firm’s CFO “didn’t find that reassuring, to say the least.”
However, a tech CEO showed sympathy for the bank’s plight, asking: “What news would ever reassure you that your money is safe when other people are telling you a scam is taking place?” There is no news because it is not news. It’s the prisoner’s dilemma thing… Everyone has to imagine in this moment now what everyone else is going to do.
When asked for comment, an SVB CNBC representative referenced the FDIC announcement, adding, “The FDIC will share additional information as it becomes available.”
“A Twitter-led bank run”
Several venture capitalists were quick to ask their portfolio companies to transfer 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 executive at an AI startup said the company’s CFO handled the situation quickly and it had enough money to pay employees on time. Still, SVB’s collapse left a bitter taste in the mouths of the board, which said the bank’s collapse felt like “unnecessary hysteria”.
“It makes me disappointed in our ecosystem,” said the startup CEO.
Many venture capitalists shared the startup CEO’s sentiment that SVB’s collapse felt like a self-fulfilling prophecy fueled by needless panic. Some likened it to a “Twitter-led bank run” as the tech community took to social media to spread information, often panicking. A prominent tech CEO told CNBC that numerous startup founders use Twitter and Meta‘s communication service WhatsApp to send each other quick updates.
One venture capitalist said it was like someone yelling “fire in a crowded theater where there’s no fire.”
“And then when everyone rushes to the door, they knock over the oil lamp and there’s a fire and it burns down the building,” the venture capitalist said. “And then the same person [is] To stand outside and say, ‘See, I told you so.’”
As the panic spread and the FDIC stepped in, companies with frozen funds reported problems withdrawing cash and processing payroll.
One startup founder told CNBC that “everyone is screwed.” He said he spoke to more than 30 other founders and that both large and small companies were affected.
The founder added that a CFO of a unicorn startup tried to get more than $45 million out of SVB and was unsuccessful. Another company with 250 employees told the founder that SVB had “all our money”.
Another founder said her company’s payroll provider switched from SVB to another bank on Thursday, meaning payroll for employees didn’t go as planned on Friday morning. She said she’s communicated too much with staff to allay her concerns as much as possible and she expects payroll to be done by the end of the day on Friday.
If it doesn’t, the company plans to refer employees who need immediate fund coverage directly, according to an internal memo seen by CNBC.
“A lot of people live in the dollar when it comes to budgeting and can’t afford a 24-hour delay on their paycheck,” the founder said.
Payroll service provider Rippling on Friday told some customers their payments would be delayed due to the bank’s “unexpected solvency problems,” 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 payment delays.
Aaron Rubin, CEO of e-commerce logistics startup ShipHero, said he was forced to manually pay some employees on Friday because his company relied on Rippling for payroll services.
“We found out this morning that nobody was paid,” he said. “We started paying our warehouse workers manually because we didn’t have time to manually send payments to everyone.”
Warehouse workers make up about a third of ShipHero’s 600 employees, Rubin said. The remaining staff, which mainly includes customer service and technical staff, will be paid next week.
“Our concerns are longer-term,” Rubin added. “Could some of our customers have liquidity problems? I don’t think we know about these ripple effects yet. Are we going to have trouble getting paid by our customers because they’re going to have trouble?”
On Thursday, Jean Yang, the founder and CEO of surveillance company Akita, attempted to make an online bank transfer to ensure she could handle payroll for her team of seven, but found she was unable to complete that type of transaction until then . She drove to the SVB location on Sand Hill Road in Menlo Park, a street full of venture capital offices.
There she asked a cashier for a bank transfer and was told the branch could not do it. So she asked for a bank check for $1 million. After 20 or 25 minutes the bank handed it over.
Others in line took out their entire balance. “I regret we haven’t taken out all of our credit now,” she said.
On Friday, Yang returned to the Silicon Valley Bank branch 15 minutes before opening to remove the remaining money. A queue of about 40 people had formed. Gossip spread among those waiting. One person showed a tweet on their phone that suggested bank employees had been ordered not to come to work. (Reuters reported a related memo from the company.)
Then an employee came out of the office and offered about 15 copies of an FDIC article on the agency’s response to the bank’s situation. The line dissolved as people realized the bank’s fate.
Later Friday, one of the startup’s investors called Yang and offered to help Akita with payroll, she said. “My hope is that the government will bail out people beyond $250,000,” she said. “I know people with tens of millions, hundreds of millions [of dollars] with SVB. I think if they get even $250,000 their businesses will be wiped out.”
“Now everyone is waiting to see when the Treasury Department will step in,” said another venture investor. “Hopefully [California Gov.] Gavin Newsom is on the phone with Biden right now and says, “It’s systemic in our space, but you can see the impact on other banks and their stocks and their bonds.” If it’s systemic, I think the Treasury Department will step in like it did in 2007 and 2008 and will protect the money market accounts, plus the depositor.”
This person added: “If they don’t intervene, people will assume money is lost. This will have a huge impact on the business environment.”
Regard: CEOs react to Silicon Valley bank shutdown