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What the Silicon Valley Bank meltdown means for startup leaders

CEOs were scrambling to move their money ahead of the influential bank's shutdown: "This is a critical fail for the US tech industry."

Silicon Valley. (Photo by Flickr user Patrick Nouhailler, used under a Creative Commons license)
Full disclosure: Silicon Valley Bank has previously sponsored Technical.ly events.
Silicon Valley Bank has been shut down.

SVB is among the world’s most influential financial institutions, working with companies in sectors from venture capital to private equity to premium wine. The California-based commercial bank holds special significance in the tech sector, as it reportedly holds the business of half the country’s venture-backed tech and healthcare companies.

When SVB launched in 1983, it was part of the new infrastructure to support the specific kind of high-growth, risky company that its founding region prioritized. Its expansion over the next 40 years became tightly tied to how many American cities were following a homogenous Silicon Valley approach to business building.

On Wednesday, SVB announced its plans to raise capital by selling $1.75 billion in stock shares with the goal of gaining flexibility in the currently challenging financial market. The news sparked panic for clients, including investors and company leaders keeping their cash with the bank. SVB’s public stock plunged yesterday. Investors began advising their portfolio companies to move their money from SVB, fast, up to $250,000 — the FDIC’s standard insurance threshold.

As of Friday morning, the company was reportedly considering a sale — and as of midday, it had been closed by the California Department of Financial Protection and Innovation, which named the Federal Deposit Insurance Corporation (FDIC) as receiver.

“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023,” the federal entity said in a statement. “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”

The upheaval has big implications for startups across the United States, and Technical.ly will be following this news closely over the next few days. On Friday morning, we asked founders and startup leaders across our markets what the bank’s meltdown meant for them, and if they were pulling their own money from it. Many told us: yes.

Why a bank shutdown matters

If a financial institution goes under, money held there past its $250,000 protected threshold could be at risk.

Until it actually did, whether SVB would go under wasn’t a given. As explained by Fortune’s Term Sheet on Friday morning: “The thing about a bank run is that it doesn’t really matter if a financial institution’s books are strong or not. What matters is what customers believe about their books.” SVB CEO Greg Becker asked its clients to “stay calm.” If enough clients pulled their money, SVB wouldn’t have enough to match what’s coming in and going out.

By Thursday, enough customers already believed there was trouble that they began moving their money from SVB en masse.

What SVB’s moves mean to startups

One of those pulling the trigger on a move is Philly’s Jessie Garcia, founder of hardware startup Tozuda. She and other founders she knows were in the process of actively moving money out of the bank Friday morning, per investor advice. Accountants were sending messages to SVB clients encouraging them to consider moving assets, she said.

“It’s a CEO’s fiduciary responsibility to protect company assets. While there is hope from the greater VC community that SVB will pull through a sale at this point (since they are a cornerstone of the startup banking ecosystem) it’s risky to hold all capital in one location in case that doesn’t happen,” she wrote to Technical.ly. “And you’re only protected up to 250k. It’s all about keeping your company liquid and protected. The message overall is to be proactive as this plays out.”

Another founder who is currently participating in a Techstars accelerator said they’d gotten a heads up about the situation from the program on Thursday. In a memo to Techstars participants that was provided to Technical.ly, leadership acknowledged that many Techstars companies have financial relationships with SVB. Because of the accelerator organization’s longstanding partnership with the bank, SVB’s head of startup banking had offered to make himself available to portfolio companies, the memo said.

The founder who provided the memo to Technical.ly said they don’t currently bank with SVB, but were in the process of transitioning funds to the financial institution.

“I don’t intend to start banking with them for a while at least, due to this news,” they said in an email.

Cenk Sidar, CEO and cofounder of DC-based Enquire AI, said his company does bank with SVB, though it keeps assets diversified, so the impact was negligible. But he hopes SVB and the industry at large will be able to find a solution. The huge impact the situation has on founders who work largely or exclusively with the SVB, he noted, is not something to take lightly.

This is a critical fail for the US tech industry.Cenk Sidar Enquire AI

“This is a critical fail for the US tech industry,” Sidar told Technical.ly. Still, he does hope to continue working with the entity going forward — though the company is keeping an eye on the situation — as SVB is a “phenomenal” bank provider and supporter of the local community for early-stage tech companies, he said.

That diversifying of assets was also a tactic of Philly founder Jake Stein, who cofounded legal contracts startup Common Paper last year. He and cofounder Ben Garvey do not bank with SVB, but the pair is in the midst of the Y Combinator accelerator based in the Bay Area, where SVB is located. They have several friends who do bank with SVB, Stein said, and as of Friday morning, many were trying to “reduce their funds there” to the FDIC protected $250,000.

“Our strategy has always been to keep all our cash split between FDIC insured accounts and treasuries, and I think that makes sense regardless of which bank you use,” Stein said.

What it means for startup ecosystems

The support Sidar described goes beyond SVB allowing startups to bank with it. DC area-based Anthony Millin noted that NEXT powered by Shulman Rogers, the startups- and growth companies-focused legal services provider that he chairs, has collaborated with SVB on various events designed to help startup leaders network and learn how to best thrive. (That includes, in the interest of full transparency, a 2022 dinner that Technical.ly co-organized).

NEXT’s relationship with SVB began about two or three years ago, Millin said, within both entities’ efforts to grow and support the DMV’s startup ecosystem. While he couldn’t speak to any concrete and privileged client relationships that Shulman Rogers attorneys have with SVB-banking companies, Millin did say that any loss of SVB’s local involvement would hurt DC’s startup community.

“Any time you have a [loss of] a committed supporter and member of our local, regional startup scene and ecosystem, it’s a loss to the system,” he said. “So, if there were programs, events and activities that were being supported … on that level, I think that is a loss of an organization that, through its local leadership, focused on startup companies and their hard work and commitment to support companies here.”

Stein agreed: No matter what happens over the next several days and weeks, the situation is “a bummer” for those in the startup world.

“SVB has a been an amazing supporter of the startup ecosystem for decades,” he said. “I really hope they come out of this OK.”

_

This is a developing story. Do you bank with SVB, or have thoughts on its situation? Email us: editorial@technical.ly.

Companies: NEXT powered by Shulman Rogers / Common Paper / Techstars / Silicon Valley Bank

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