Headlines were made this week as trading halted on the Nasdaq and customers rushed to withdraw their money from Silicon Valley Bank (SVB). The company, widely known to be a favorite for the startup community, announced it was raising $2.25B in an attempt to raise money to shore up its balance sheet. Rising interest rates forced the company to sell assets at a loss, triggering a chain of events that culminated in regulators stepping in to shut the company down. The downfall was expected to have significant repercussions on the startup and venture capital ecosystems that rely on the bank’s services.
What is Silicon Valley Bank?
Based in Santa Clara, Silicon Valley Bank (SVB) is widely respected in the startup community and is one of the top banking institutions for startups. They offer a range of financial and banking services to support the growth and innovation of companies. As of December 2022, the bank had roughly $209B in total assets and $175.4B in total deposits, with roughly 95% of deposits being uninsured. It is ranked the 16th largest commercial bank in the US and, according to its website, banks nearly half of all U.S venture-backed startups.
What happened?
During the COVID-19 era, startups were flush with cash as a result of low interest rates, and a significant portion of the capital raised was deposited into SVB. The bank invested most of this money into long-term, stable Treasury bonds. Rising interest rates led to a decline in startup funding, and startups inevitably were burning through cash that was previously deposited at SVB. With less money coming in and more money going out, the bank decided to sell a portion of its bond portfolio to generate cash.
Interest rates have a direct correlation to bond yields; as interest goes up, so do bond yields. Newly issued bonds offered higher returns, making existing bonds with lower yields less attractive to investors. SVB had $21B in bonds with a 1.79% yield for 3.6 years. Today’s 3-year bonds offer a return of over 4%. SVB sold $21B worth of government bonds at a loss of $1.8B.
This is significant given that their net income for 2022 was $1.67B. To cover the losses, SVB set out to raise $2.25B which is when things took an unexpected turn.
Bank Run
Concern among startups and venture capitalists were mounting as SVB announced they were raising money to offset losses. This spooked investors, leading to a sell off that caused the stock to plunge 68% in pre-trading hours before ultimately being halted.
Startups grew concerned about their ability to access funds needed for essential operations such as payroll and other expenses. VCs who had invested large amounts of capital into startups were advising their portfolio companies to transfer funds away from SVB. Despite the CEO of SVB urging people to ‘stay calm’, panic set in as companies rushed to move their money out, leading to what is commonly referred to as a bank run. The SVB announcement came on March 8, and by the end of March 9, customers withdrew a staggering $42B. By March 10, trading was halted and the FDIC had stepped in to shut down SVB and seize their assets.
Implications
The impact of this event extends beyond the significant losses incurred by U.S. banks, which saw their market value drop by $52B on March 9th. Startups are typically not in a position to wait for creditors to recover their funds through liquidation and asset sales. Without sufficient funds for payroll, startups could face employee layoffs or, in the worst-case scenario, permanent closure.
Several firms were already feeling the impact as they scrambled to make payroll.
The impact is not limited to startups alone as some large publicly traded companies also had their funds deposited with SVB. The crisis spread to Europe as well, prompting startups to rush to transfer their funds out as withdrawals were backing up.
The cryptocurrency market was also impacted when news of Circle, with $3.3B stored in SVB, caused the USDC coin to lose its $1 peg. The coin eventually bounced back and regained its value.
There is some consensus that not supporting SVB could result in far-reaching consequences.
Several prominent figures in the finance world, including American investor Bill Ackman, have spoken out on the severity of the issue: “The failure of SVB could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash.” Garry Tan, CEO of Y-Combinator said “This is an extinction-level event for startups”. Tan estimated that about 30% of YC’s startups will have issues making payroll next month if they cannot access their money.
Aftermath
On March 12th, the US government announced it would take extraordinary measures to guarantee the availability of all deposits by March 13th. The Federal Reserve created a new program offering loans lasting up to one year to customers affected by bank failures. This is welcome news for customers, the majority of whom did not have their deposits insured. The announcement came amid concerns of a wider financial collapse. The downfall of SVB represents the second-largest bank failure in the history of the United States.
“I’m going to find moral redemption at the roulette table.” -Mark Baum, The Big Short (2015)
