Silicon Valley Bank
SIVB,
a 40-year-old bank at the heart of the valley’s ecosystem, was forced to shutter Friday after its core depositors — many of them startup companies — took out $42 billion out in a shocking bank run that started Thursday, leaving many unanswered questions in the tech world.
As the Federal Depository Insurance Corp. put the bank into receivership and created a new bank, Deposit Insurance National Bank of Santa Clara, to pay its insured deposits starting Monday, small companies who have relied on the bank will likely face some ripple effects of their actions, as they tried to protect their funds.
After Silicon Valley Bank announced Wednesday that it disclosed large losses in its securities portfolio, startup companies began to get warnings from their investors to withdraw their funds. Bloomberg reported that Peter Thiel’s Founder Fund advised companies to take out their money, among many others.
“I have seen a lot of the emails from the VCs to portfolio cos, it is unfortunate,” said Samir Kaji, chief executive and co-founder of Allocate, a platform for investment managers and family offices. “But on one hand you can’t blame people for not wanting to take a chance.” Kaji, who worked at Silicon Valley Bank for 13 years before cofounding Allocate, said he believed SVB was not at risk of insolvency before its depositors started the mad digital run on their deposits.
He said that the bank, which was entrenched in the startup/VC community, benefited from a strong community, “which works when it’s going well.” But he said that what happened in the last two days was equivalent to a stampede running out of the building threatened with fire. “But in fear of being the last one out, someone trips on a candle, and sets the building ablaze,” Kaji said.
Indeed, a state court filing late Friday noted that the bank was in “sound financial
condition” prior to March 9, when “investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank.” The filing stated that as the close of business Thursday, the bank had a negative cash balance of approximately $958 million.
Bob Ackerman, founder and managing director of AllegisCyber Capital, an early stage VC firm, was angry with fellow VCs who he said led the run on the bank, in the guise of their fiduciary duty. He equated Silicon Valley Bank and its role in the startup community to Jimmy Stewart’s character George Bailey in the 1946 film, “It’s a Wonderful Life,” who gave home loans to people in the small town of Bedford Falls, to people a big bank won’t help.
“They understood the financing of young innovative companies, they understood the financing cycles, why they created value,” Ackerman said in an interview. “In good and bad times, SVB were the people you could count on, when all the commercial banks were cutting and running, Silicon Valley Bank were the stalwarts, honored their commitments, and looked for ways to be constructive.”
Ackerman said that the venture capital firms who recommended to their clients to withdraw their funds should have tried to work with the bank. He said that the bank had insurance on corporate sweep accounts for up to $125 million. And that he recommends his own client companies to diversity their holdings, so that not everything is tied up at one bank. He equated all the VCs who led the run on the bank to the evil Mr. Potter in the film, who put Bailey’s home loan company at risk when he did not return the money he found that Bailey’s absent-minded uncle lost while trying to make a bank deposit.
“I want to see a list of the initial venture firms that started the run because I will never do business with them,” he said. “If they were to turn on an institution after 40 years, I don’t want to be in business with them.” Ackerman said that he believes some VCs and entrepreneurs have never seen a downturn or a bad economy and had no experience in how to deal with the fact that the once flowing money spigots have shut off for the time being.
The recent cash burn at many startups over the past few months in a tough economy and a closed IPO window also were factors in the bank’s woes.
“Silicon Valley Bank is arguably a Silicon Valley institution. It has been around for decades, banking with the VC industry and the startup industry for decades,” said Bob Hendershott, associate professor of finance at Santa Clara University’s Leavey School of Business. “And it turned out that was their downfall.”
Hendershott said that in 2021, when a big flood of money was coming into Silicon Valley, a lot of that money was invested by VC firms in a lot of startups. “A lot of it ended up in bank accounts at Silicon Valley Bank.”
“But the real cause was the decisions made a year or two ago about what to do with these deposits, they just made a bad bet,” Hendershott said. As burn rates increased at companies needing more cash, and they also stopped depositing money received from VCs in investing rounds, as the investing rounds slowed or stopped altogether.
“If the start-ups are having a hard time raising money, their total deposits start to shrink rapidly,” Hendershott said. “That has been happening for months.”
“It’s a sad day for the tech ecosystem,” said one venture capitalist asked not to be named.
Will another bank replace the bank for Silicon Valley, a bank that most people outside of the Bay Area tech world have never heard of? Ackerman said he hopes that the bank is acquired over the weekend and that it retains all the employees of Silicon Valley Bank who have the expertise of working in the startup community.
He fears that some startup companies will be at risk of not being able to make their payroll next week. In addition, the future owners of the bank may not be as easy to work with, for early stage tech and biotech firms who are unprofitable.
“It is a tragedy…It never should have happened,” he said.
