Making Sense of the SVB Collapse
A Special Off Schedule Blog Post
In a stunning development, the California Department of Financial Protection today shuttered the Silicon Valley Bank after a “run on the bank”. The 40-year-old firm was the backbone of tech industry banking and its closure represents the largest bank failure since The Great Recession of 2008 to 2009.
According to the FDIC, insured depositors will have full access to their money by March 13, while SVB branches will reopen on Monday. Uninsured depositors will be paid an advanced dividend within a week. The FDIC insures accounts up to $250,000. This is important: It’s too early to tell what this means for the availability of those funds beyond the $250k insured amount.
SVB’s travails have already impacted technology startups, as well as VC and PE investors in Silicon Valley and beyond. For years, SVB was a core player in the technology ecosystem, operating as a full-service bank mainly for technology companies worldwide. It accepted deposits and loaned money, provided treasury management, international banking, wealth advisory, online banking, foreign exchange, trade finance, and other services.
So what happened:
SVB’s cash crunch was caused by:
Precipitous decline in VC and PE fund deposits last year and especially in January and February of this 2023, due to low limited partner (LP) investments arising from fewer great exits and resultant poor LP ROIs.
Events snowballed after SVB announced a share sale to shore up its finances following significant losses to its portfolio arising from the sudden decline in the value of bonds on SVB’s balance sheet, plus increased loan defaults among its customers.
Shares of SVB parent SVB Financial Group plummeted this week, dropping 20% in post-market trading after ending Thursday's session 60.4% lower. Before they stopped trading in SVB stock today, the price dropped another 50% earlier in the day.
Mid-day yesterday, Tier 1 and 2 VC and PE firms advised startup founders, CEOs, CFOs, and Board Directors in their portfolios to seek alternative banking options. Among them was Peter Theil, co-founder of the Founders Fund, who on Thursday afternoon Tweeted and publicly advised his portfolio CEOs and CFOs to pull their funds about of SVB. Many other leading VC and PE firms, startups who just raised money and others followed suit. This is how the run on SVB gained momentum.
Deposit risks vs. Treasury bond value declines caused the stock price to plunge after the bank tried to reposition its balance sheet publicly, acknowledging it expected interest rates to stay higher for longer. SVB CEO Greg Becker exacerbated this drop with some ill-phrased advice. During a conference call with clients, he advised them to "stay calm" because the bank had "ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge." This is how the run on SVB gained even more momentum.
Continuing late into Thursday night and Friday morning, VC and PE spent considerable time helping founders make decisions on bank transfers, funding options, and generally surviving the situation. If you your money transfer orders were put in before 2 p.m. PST (5 p.m. EST) yesterday, SVB fulfilled the transfers. Anyone coming to the table after that cut-off time—some of them VCs and startups with millions of dollars of hard-fought funds—were shit-out-of-luck. News of the 2:00 pm deadline was an “Oh shit” moment for many CEOs and CFOs of startups.
The immediate beneficiaries of the SVB malaise were large banks—those considered “too large to fail”—with technology banking practices, such as Bank of America, Capital One, First Republic, Chase and Wells, etc. Large investment banks with retail or commercial practices also benefited, such as JP Morgan, Morgan Stanley, and others. Finally, the new FinTech online banks with easy transfer and online checking facilities for smaller transfers, such as Chime, Grasshopper, JumpStart, Neat, Zil, and others, have also seen deposits increase from startups.
By mid-day today, several large financial institutions expressed explicit interest in acquiring SVB as a way to capture the technology company, VC and PE cash wad in the years to come.
As the FDIC sells Silicon Valley Bank assets, future dividend payments may be made to uninsured depositors.
Finance leaders in technology companies have observed that SVB faced strong headwinds, and lost many deals to smaller banks and FinTech firms entering the market with very aggressive pricing on services. Additionally, some CFOs will say confidentially that SVB was arrogant (“rested on their laurels”) for many years, a hubris built on its large share of public and private technology companies, and VC and PC investment capital.
There are a couple of predictable outcomes from this mess:
Any startup with frozen funds is liable to run into cash shortfalls, which are treacherous, and other banks will fill the void left by SVB’s weakened state.
Other banks may see short- to medium-term declines in their stock valuation due to the large number of tech companies among their customer base (e.g., Republic Bank).
It is also possible that new “stress tests” will be developed by regulators and applied to online and technology industry banks thanks to the impact on deposits and balance sheets that we’ve seen with SVB collapse.
I have to conclude by saying that its likely, given previous tendencies, by the middle of next month—after this totally crazy day—that this situation will be largely forgotten by most of us.
Which reminds me of advice I received from my friends from France: “Mangez bien, riez souvent, aimez beaucoup”. (This expression means, “Eat well, laugh well, and love abundantly” — implicitly, because life is short.)
Well said!