Silicon Valley Bank bankruptcy destabilizes tech startups in the US

The sudden collapse of a major Silicon Valley lender has tech investors and startups scrambling to figure out their financial exposure and the impact on their ability to operate, at a time when many companies were already on the verge of widespread layoffs and with less access to capital in an uncertain economy.

California regulators closed Silicon Valley Bank on Friday and placed it under the control of the US Federal Deposit Insurance Corporation (FDIC). The FDIC is acting as a receiver, which typically means it will liquidate the bank’s assets to pay its customers, including depositors and creditors.

The move ended a stunning 48 hours during which uncertainty over the prominent tech lender’s liquidity prompted some startups to consider withdrawing funds and also sparked fears of a contagion risk to the wider financial sector.

After the bank’s collapse on Friday, uncertainty in the startup community has only increased, with founders worried about getting their money out, paying payroll and covering operating expenses.

“Now that the bank has failed, I just want to know what happens next,” Ashley Tyrner, founder of health food delivery company FarmboxRx, told CNN in an email. “The FDIC covers 250k, but will I get all my 8 figures back?”

Parker Conrad, CEO and co-founder of HR platform Rippling, said on Friday that his company found that some clients’ payrolls are behind due to the bank’s “solvency challenges”.

“Our top priority is to get our clients’ employees back as quickly as possible, and we are working diligently towards this across all available channels and trying to learn what the FDIC takeover means for today’s payouts,” he wrote on Twitter.

Arjun Sethi, an investor at Tribe, tweeted on Friday that “at the moment, venture capital [financiamento para negócios] are writing emails to publicize exposure to SVB”. Meanwhile, Sam Altman, CEO of OpenAi and former president of startup accelerator Y Combinator, said investors should consider offering “emergency money for their startups that need it for payroll or whatever.”

He added: “no documents, no terms, just send money.”

At least one company tried to make a quick buck by offering a last-minute sale.

Ben Kaufman, co-founder of toy store and online retailer Camp, said in an email to customers that “most of our company’s cash assets” were in “a bank that just failed.” In the same email, Kaufman announced a 40% discount on all merchandise online for customers using the code: “BANKRUN”.

“Or you can pay full price without the code – which is also appreciated,” he wrote. Kaufman said that any sales from this point on “allow us to generate the cash needed to continue operations so that we can continue to deliver unforgettable family memories.”

“Mass hysteria”

Even before the collapse, several startups reportedly considered pulling their money out of the bank, according to media reports and public postings by venture capitalists.

Founders Fund, an influential venture capital firm founded by billionaire Peter Thiel, reportedly advised its portfolio companies to withdraw money from the bank. A Founders Fund representative declined CNN’s request for comment.

Tribe Capital, meanwhile, urged companies to be mindful of where they keep their money and how they raise funds. “Any bank with a business model is dead if they all move,” Sethi wrote in a memo to the founders, which he shared on Twitter. “Since the risk is non-zero and the cost, it is better to diversify your risk, if not all.”

Sethi urged the founders to “keep their assets in traditional banks more liquid and not take unnecessary risks”. He also recommended that founders “bind all lines of debt, close all primary rounds, do it now and be willing to compromise.”

But when Tyrner’s company tried to withdraw funds, it was too late, she said.

“The entire SVB system was down,” she told CNN. “We couldn’t log into our accounts, we couldn’t get in touch with anyone, the helpline rang with a “disconnected” message or just hung up… none of our account representatives responded to calls or emails.”

Other prominent venture capitalists called for calm in an apparent attempt to avoid stoking panic. Mark Suster, a partner at venture capital firm Upfront Ventures, urged members of the VC community to “speak out publicly to quell the panic” surrounding Silicon Valley Bank, saying in a lengthy Twitter thread that “the classic ‘runs in the bank’ harmed our entire system.”

Despite urging people to stay calm, he added: “I know that some have already withdrawn money. I know some are advising this. I know it’s scary… What matters is that we don’t have or create mass hysteria.”

Villi Iltchev, a partner at Two Sigma Ventures, also said his colleagues should “support” the bank. “SVB is the most important provider of capital for tech startups and the biggest supporter of the community,” he said in a tweet. “Now is the time to support them.”

More challenges for startups

The rapidly unfolding fallout at Silicon Valley Bank comes at a challenging time for the tech industry. Rising interest rates have eroded the easy access to capital that has helped fuel soaring startup valuations and funded ambitious and loss-making projects.

Development financing in the United States dropped 37% in 2022 compared to the previous year, according to data released in January by CBInsights.

At the same time, broader macroeconomic uncertainty and recession fears have led some advertisers and consumers to tighten spending, cutting off the industry’s revenue generators.

As a result, the once-prosperous tech world has descended into a sharp cost-cutting season marked by mass layoffs and a renewed focus on “efficiency”.

The situation at Silicon Valley Bank may have been made worse by more startups running low on cash and needing to withdraw funds. Now, the bank’s collapse risks exacerbating the industry’s cash crunch and broader turmoil.

In his post suggesting a bailout may be needed, Ackman said a “bankruptcy” of the Silicon Valley Bank could “destroy an important long-term driver of the economy, as venture capital-backed companies rely on the SVB for loans and retain their operating cash”.

Ackman compared SVB’s situation to that of Bear Stearns, the first bank to collapse at the onset of the 2007-2008 global financial crisis. But this time, trouble is brewing in Silicon Valley’s backyard.