Silicon Valley Bank’s stunning collapse has led to the freezing of tens of billions of dollars stored there by startups and their private equity backers, raising fears of a wider tech sector fallout.
The company, whose website says it is “the financial partner of the innovation economy,” was taken over Friday by the US Federal Deposit Insurance Corporation (FDIC) to prevent further damage.
“SVB knew the entrepreneurial community,” Joseph DeSimone, a professor at Stanford University and founder of several startups, told AFP.
“They helped us recruit people, helped with securing mortgages for transplants, gave financial advice to new executives… So their disappearance is a real loss,” he said.
The company previously boasted that “nearly half” of technology and life science companies that had US funding banked with them, leading many to worry about the possible ripple effects of its collapse.
For banks that are FDIC-insured, only US$250,000 (RM1.13 million) per account is guaranteed.
But according to SVB’s latest annual report, 96 per cent of its total US$173 billion in deposits was uninsured.
The FDIC said Friday that all accounts would quickly get access to the insured portions of their deposits, but that the rest would depend on how much is recovered from sales of the bank’s assets, an often lengthy process.
“The real victims of the SVB fallout are the depositors: startups with 10 to 100 employees, who cannot make payroll, and will have to furlough or shutdown workers as soon as Monday,” tweeted Garry Tan, head of the well-known incubator Y Combinator.
He warned that “years of US innovation” are on the line, as an entire “generation of American startups” could be destroyed in a month or two.
‘Doesn’t look good’
Activist investor Bill Ackman raised a similar alarm on Twitter, saying that SVB’s collapse “could destroy an important long-term driver of the economy.”
“If private capital can’t provide a solution, a highly dilutive gov’t (government) preferred bailout should be considered.”
According to several US media reports, SVB had discussed on Thursday and Friday a possible buyout with several banks, but could not find a solution quickly enough.
Champ Bennett, cofounder of the video platform Capsule, revealed on Friday that the US$5 million raised in mid-February during the company’s first seed funding round was housed at SVB and now inaccessible.
“What happens next is anyone’s guess, but it doesn’t look good,” he tweeted.
Bennett added that an intervention should not be viewed as “bailing out ‘The 1’ or ‘Big Tech’,” pointing to the “thousands of the most hardworking, talented individuals” at impacted companies who are currently “struggling.”
According to the news website Semafor, hedge funds are offering to front cash to SVB’s corporate clients, but at a 20 to 40 per cent discount.
Beyond that, Adam Arrigo, boss of virtual gig platform Wave, warned his fellow tech entrepreneurs: “Whether or not you had money in SVB, you are not unaffected. This is going to materially impact everyone.”
Like others, Bennett says he is also concerned about the fate of other banks favored by the tech industry, including California’s First Republic, whose stock price fell 30 percent in two days.
Some see in the back-to-back failure of two banks, SVB and Silvergate Bank, an example of the financial system’s precariousness.
“What happened to everyone talking about how banks (SVB, Silvergate) are safe and better than Crypto DEFI?” tweeted US investor Arjun Sethi.
DeFi, or decentralised finance, allows users to theoretically access their funds at any time and without intermediary, but comes without deposit protections or regulations.
Fallout Spreads from London to Singapore
The fallout from the collapse of Silicon Valley Bank is beginning to spread around the world.
Startup founders in California’s Bay Area are panicking about access to money and paying employees. Fears of contagion have reached Canada, India and China. In the UK, SVB’s unit is set to be declared insolvent, has already ceased trading and is no longer taking new customers. On Saturday, the leaders of roughly 180 tech companies sent a letter calling on UK Chancellor Jeremy Hunt to intervene.
“The loss of deposits has the potential to cripple the sector and set the ecosystem back 20 years,” they said in the letter seen by Bloomberg. “Many businesses will be sent into involuntary liquidation overnight.”
This is just the beginning. SVB had branches in China, Denmark, Germany, India, Israel and Sweden, too. Founders are warning that the bank’s failure could wipe out startups around the world without government intervention. SVB’s joint venture in China, SPD Silicon Valley Bank Co, was seeking to calm local clients overnight by reminding them that operations have been independent and stable.
“This crisis will start on Monday and so we call on you to prevent it now,” UK startup founders and chief executive officers said in the letter to Hunt. The companies listed in the letter include Uncapped, Apian, Pockit and Pivotal Earth.
Hunt spoke with the governor of the Bank of England about the situation on Saturday morning, and the economic secretary to the Treasury was holding a roundtable with affected firms later in the day, the Treasury said.
Underscoring the challenge governments face in getting a handle of the full extent of the fallout: The UK Treasury has begun canvassing startups, asking how much they have on deposit, their approximate cash burn and their access to banking facilities at SVB and beyond, two people familiar with the matter said, asking not to be identified because the information isn’t public. Treasury declined to comment on the survey.
Founders were anxiously awaiting the outcome of the roundtable and any information about how their deposits at the bank would be handled. Toby Mather, CEO of UK-based education software startup Lingumi, has 85% of his company’s cash in SVB. He tried to transfer some of his accounts, but as of Saturday evening, he wasn’t sure whether that worked. “This is life or death for us,” he said. “These things seemed so mundane before.”
Jack O’Meara, founder of the London genomics startup Ochre Bio, spent the weekend trying, unsuccessfully, to move deposits out of SVB. “If there is no intervention,” he said, “it could really wipe out a generation of entrepreneurial companies.”
As in the US, some SVB deposits in the UK are insured, but it was unclear when those funds would be available. A deeper concern among startup leaders is that the SVB collapse would throttle future funding from venture capital into the UK, where businesses are already hobbled by Brexit.
Asia’s tech leaders are scrambling to assess the potential ramifications too. In Singapore, financiers and entrepreneurs at a Wharton alumni gathering in the Shangri-La shared news about the fallout, while startup founders and investors at a conference in Mumbai talked about nothing else.
“The impact of the SVB incident on the technology industry should not be underestimated,” analysts led by Liu Zhengning at China International Capital Corp said in a note. Deposits are crucial for tech startups because they generally require a lot of cash to pay for hefty expenditures including research and development costs and staff salaries, they said.
“If these cash deposits finally have to be impaired in the process of bankruptcy or restructuring, some tech firms may face high cash flow tension,” they said. “The risks of bankruptcy should not be excluded.”
Back in Silicon Valley, US Congressman Ro Khanna from Santa Clara held a town hall late Friday that was attended by more than 600 people including startup founders, tech leaders and SVB employees. It went on for more than 2.5 hours with the primary focus on small businesses trying to make payroll across the nation come Monday.
SVB customers in California, many of them startup founders, stood outside of the bank’s branch on Silicon Valley’s famed Sand Hill Road in the cold and rain on Friday, knocking on the locked glass doors and trying to get representatives of the Federal Deposit Insurance Corporation to answer their questions.
A drones startup founder there said a withdrawal she made on Thursday hadn’t gone through and that she was concerned about making payroll for her 12 full-time employees. She had tried calling the FDIC multiple times, “but the number doesn’t answer”, she said.
Another customer remarked that he should have brought a bottle of whiskey to pass around as they waited. In trying to get more information from an FDIC representative, he said, “Put yourself in our shoes.” The representative apologised before closing the glass door once again.
Some in the VC and startup world are trying to come up with temporary fixes. Uncapped, a UK financial tech startup that lends to other startups, said it’s launching an emergency funding program to help companies meet payroll and other obligations, as well as longer-term bridge loans to help with working capital.
Alexander Fitzgerald, founder of broadband startup Cuckoo and a former Treasury official, noted that the finances of British startups are already stretched due to a slowdown in venture capital funding market. “British startups need the Treasury to step in fast,” he said.
In Canada, SVB Financial Group’s unit in the country reported C$435 (US$314 million) in secured loans last year, double the C$212 million a year earlier, regulatory filings show. Its customers include e-commerce software provider Shopify Inc and pharmaceutical company HLS Therapeutics Inc, according to a previous statement by the bank.
Toronto-based advertising-tech firm AcuityAds Holdings Inc revealed on Saturday it had US$55 million in deposits at SVB, amounting to more than 90% of its cash. The firm had halted trading of its stock Friday after a 14% slump, citing the “unfolding situation” with Silicon Valley Bank. — AFP, Bloomberg
