The federal government has taken control of Silicon Valley Bank, (SVB) a startup and venture-focused bank based in California whose losses triggered panic in the startup industry and in the banking world.
The Federal Deposit Insurance Corporation (FDIC) created a new entity to take charge of SVB on Friday, called the National Bank of Santa Clara, according to the New York Times.
How it started: On Wednesday, the small, California-based startup-focused Silicon Valley Bank, (SVB) reported losing some $1.8 billion on its investments after embarking on what Insider called a “firesale” of its bond portfolio. This was done to “reposition balance sheet for current rate environment,” the bank said in the presentation, adding it planned to try and raise $2.25 billion by selling stocks.
According to Bloomberg, this led to concerns about the bank’s stability, leading investors and VC firms to privately ask or advise their startups to pull their money out of the bank, including Founders Fund, Union Square Ventures, and Coatue Management.
This began what a “classic bank run,” John Wu, President of blockchain technology company Ava Labs, told Bloomberg Television. “And when the bank run starts you don’t want to be the last guy there.” (Ava Labs is backed by Andreessen Horowitz, a client of SVB.)
Put more starkly, as Insider described it on Friday morning before the federal government’s move was announced, “Everyone’s freaking out about SVB because everyone else is freaking out about SVB.”
What is a bank run?
Bank runs occur when people take their money out of one bank, and the panic associated with that action triggers withdrawals at other banks. This can lead to banks depleting their reserves of cash. The Federal Reserve requires banks to hold just 10% of a “bank’s demand and checking deposits.” As such, if everyone tries to take out their money at once, a bank can fail.
It’s a psychological as well as financial phenomenon that can cause widespread issues, as it did in the Great Depression when U.S. customers rushed to take out money, causing thousands of banks to fail.
The thing about panic in the financial system: it’s contagious. “Contagion” is when a difficult event in one part of the financial sector spreads to other parts of the system. That affected a host of companies in the crypto crash of 2022, which brought down startups from FTX to Celsius.
What’s going on with Silicon Valley Bank?
Silicon Valley Bank is based in Santa Clara. It calls itself “the go-to financial partner for investors in the innovation ecosystem and beyond,” on its website, which lists clients like Shopify and legendary venture firm and Andreessen Horowitz.
“They are probably the most popular startup bank,” Elizabeth Yin, general partner at Hustle Fund, told Entrepreneur.
So what went wrong? In simple terms, as Insider noted, SVB found itself in a difficult position after rising interest rates, which make it more expensive to borrow money, taking a toll on the world of venture-backed startups.
Startups often borrow capital from venture firms in the hopes of making a return, but it’s a risky industry and became more difficult after the Federal Reserve began raising interest rates in the hopes of curbing inflation. The bank’s strategy in particular meant it suffered more from rising interest rates, as the Times reported.
After the bank made the announcement about the losses late Wednesday, people in the startup world, such as Activant Capital, advised people to get out of the bank. SVB’s stock dropped some 60% on Thursday.
Yin added she sent an email about it to the over 400 companies in Hustle Fund’s portfolio. “If a bank run is already happening, you don’t want to be the sucker,” she explained, despite also not wanting to trigger a bank run by instigating panic.
Michael Burry, of The Big Short fame, wrote in a now-deleted Tweet on Thursday, “It is possible today we found our Enron.”
There was also broader anxiety in the banking universe. Stocks of Bank of America and JPMorgan were down 5% on Thursday, per Reuters. The KBW Bank Index on Thursday had its worse performance since June 2020, as Bloomberg noted.
Bill Ackman, investor at Pershing Square Holdings, previously called for the government to bail out the bank.
The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.
— Bill Ackman (@BillAckman) March 10, 2023
FDIC’s insurance covers up to $250,000 in deposits, which means that folks with more than that in SVB could face only partial refunds, per the Times.
Yin said she’s hopeful a giant like JPMorgan might swoop in to buy the bank and cover any potential losses as far as customer deposits, as it did with Washington Mutual after the 2008 recession.
But, beyond that, Yin has been emailing and calling, trying to help founders figure out what to do with their assets and how to communicate with investors and employees.
“This is the only thing I’ve been working on for the last 24 hours,” she said. “There are ramifications everywhere and I think we’ve just been spending a lot of time helping people stay calm,” she added.
Ashley Tyrner, founder and CEO of FarmboxRx, which collaborates with programs including Medicare, to bring food to underserved communities, told Entrepreneur her company has “eight figures,” in SVB. Tyrner declined to share the exact amount on the record, but Entrepreneur viewed a screenshot of the company’s deposit in the bank.
She was unable to wire the company’s money out of SVB on Thursday, she said, even after attempting to do so after her chief operating officer pinged her on vacation in a panic over the situation.
“We are very fortunate that this will not bankrupt the company,” she told Entrepreneur. But, if scores of startups only got $250,000 of their deposits, then, “I’m the least of the problems.”