This morning, Silicon Valley Bank had a sudden death. Even if you are in the tech space or in silicon valley, unless you are running a business you probably didn’t see how this unfolded up close. This is a short story of how this drama unfolded around me, a startup founder in silicon valley.
The first sign of trouble for me came as an email from one of our investors. It was Thursday 2pm. Hey, I’m hearing SVB is unstable. Stash some cash elsewhere. It was a short email. I checked the news, and SVB was being on a fire sale after the stock market closed. Luckily, my company Launchable switched our main bank away from SVB last year, so we were not affected. I was worried but not too worried. However, if we did keep our cash in SVB, this would have already been too late. It was already past the wire cut-off time for the day. The cash would have been stuck with SVB.
Later in the evening, I got another email from a different investor. A broadcast for the whole portfolio companies about the situation in SVB, advising them to stay calm.
Then came Friday morning. Trading was halted for SVB stocks. It was hard to keep my eyes away from the news. Institutional investors tend to create a community for their portfolio companies, so I see painful posts there from fellow founders who tried to move their money off SVB, only to find out the money is trapped. The news that FDIC stepped in came around 9am. Who would have thought we’d witness the moment that a bank of this size fails!
According to the FDIC press release, the bank will resume operation Monday, but one only gets to access up to $250K. Amount beyond that will be frozen & converted to “certificate of deposit”, and you can only liquidate them as FDIC sells off SVB assets and obtain cash. I learned that normally, another bank steps in, buy the whole asset, in order to minimize the duration of asset freeze. The same source said FDIC PR to announce a bank failure usually name that bank to reassure parties involved, but this PR didn’t name anyone.
I’m sure frantic phone calls are being made as we speak between the highest ranks of the banking industry to find such a white knight. If not, maybe the government would step in. All of that would have to play out over the weekend.
Now, $250K might sound like a lot of money for individuals, but for businesses, it’s really not that much. Paying employees, paying vendors, … if a business employes a hundred or so people, $250K is like just a few days worth of cash. Payrolls typically run mid month, which is just a few days away. Fellow CFOs around the bay area must be scrumbling to open a different bank account, & find cash anywhere they can. Fortunately, I haven’t heard so far that anyone went belly up because of this.
SVB and sillicon valley
So how come SVB dominates the tech startups so much?
Here in the bay area, there’s a finely tuned machine that mints out startups. When an institutional investor decides to invest in a seed or A round, that’s when a new company is born. They have this process figured out to the T. They know people at a law firm, SVB, an accounting firm, …. Everybody knows everybody, except us the founders. The process is almost akin to a belt conveyer. It’s like renewing a driver’s license at DMV. Welcome, nice to meet you, let me take a look, go there, sign here, then go talk to that person, sign some more, … You feel like a toddler among grown-ups.
I’m 100% positive that some contract exists between VCs and SVB to ensure the flow of new companies will go through SVB. As a founder, I really didn’t have any problem with this. My previous startup banked with SVB. All my fellow founders are banking with SVB. They are reputable, and they have programs for our needs. There’s really no reason to go out of your way to step off ths belt conveyer.
Do this for several decades, and their grip on the tech startup scene is ironclad. Unlike personal retail banking, business banking world is full of fees, so this must have been a great source of revenue for them.
… until the whole tech sector shrunk, and killed them, that is.
Boy, did we get lucky. Now I’m watching out for how this might spread to other companies. Take Brex for example. They recently refocused to tech startups, most of which are banking with SVB. They issue business credit cards for the startups, and their liquidity suddenly dried up. Are they gonna be OK? Does this impact VCs? I know many of them bank with SVBs themselves. How it all plays out, it’s up in the air. What a time!
Still, there’s no point in worrying about things you don’t control. Time to get back to work!