Silicon Valley Bank (SVB) was performing well, with low credit defaults and deposits that tripled from 2019 to 2021. However, it purchased long-term assets, including 10+ year bonds, which did not keep up with rapidly scaling Fed rates. When the Fed raised rates, the bank experienced a mark-to-market deficit in its balance sheet due to the decrease in the value of these assets.
Although SVB acquired high-quality assets, the bank would have to sell those bonds at the mark-to-market value if all depositors requested their money back at once, potentially resulting in a temporary loss. Large depositors, who are not fully insured by the FDIC, may leave if they sense any trouble, causing a "bank run."
As deposits decrease, the bank may need to sell its less liquid assets with help from the Federal Home Loan Bank to transform them into more liquid ones.
In this article, we'll tell you more about what happened with SVB, and its impact within the startup ecosystem.
Silicon Valley Bank (SVB) is a financial institution that specialized in banking for tech startups, providing financing for almost half of US venture-backed technology and healthcare companies. However, SVB recently became insolvent and was closed by the US government, leaving many startups without funds to pay their employees.
The government only covers up to $250,000 per account, which may not be enough to cover the losses of some startups. If the government or another buyer doesn't rescue the bank, it could result in the closure of thousands of companies and be worse than the 2001 dot-com crash. The bank's troubles have also caused all investment rounds to stop temporarily.
SVB encountered a classic run-on. Several forces collided to take down the bank. First, there was the Federal Reserve, which began raising interest rates a year ago, and higher borrowing costs halted the momentum of tech stocks that had benefited SVB. Higher interest rates also eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates. SVB's $21 billion bond portfolio was yielding an average of 1.79% — the current 10-year Treasury yield is about 3.9%.
At the same time, venture capital began drying up, forcing startups to draw down funds held by SVB. So the bank was sitting on a mountain of unrealized bond losses just as customer withdrawals were escalating.
On Wednesday, March 8th, SVB announced it had sold a bunch of securities at a loss and that it would also sell $2.25 billion in new shares to improve its condition. That triggered panic among key venture capital firms, who reportedly advised their portfolio companies to withdraw their money from the bank.
The bank's stock began plummeting on Thursday morning, and by the afternoon, it was dragging other bank shares down with it as investors began to fear a repeat of the 2007-2008 financial crisis.
By Friday morning, trading in SVB shares was suspended, and it had abandoned efforts to raise capital or find a buyer quickly.
California regulators intervened, shutting down the bank and placing it under the Federal Deposit Insurance Corporation (FDIC). The CEO was also found selling shares in the company, which sent a very scary message to shareholders, dropping the stock even further.
Impacts on the startup ecosystem
The FDIC typically sells a failed bank's assets to other banks, using the proceeds to repay depositors whose funds weren't insured.
Rumors about potential buyers like Elon Musk and Goldman Sachs are now surfacing. Everything is speculative until someone has a real offer letter on the table.
While a broader contagion is unlikely, smaller banks that are disproportionately tied to cash-strapped industries like tech and crypto may be in for a rough ride.
The bank's troubles have caused all investment rounds to be suspended until further notice. If the government doesn't rescue the bank, it could result in the closure of thousands of tech companies and be worse than the 2001 dot-com crash.
SVB Main issues in the public eye
1. Few banks can handle that amount of liabilities piled up after a run-on.
2. Stock panic magnified by quick withdrawals didn't even let SVB restructure in time.
3. A buyer might be able to balance the massive run of funds; the issue is when will this happen?
4. Assets over US $250K are in danger, and the US government needs to devise a plan as they took over as this might extend with hysteria.
5. Ripple effects are yet to come.
6. Many Latam startups have less than US $250k; however, there are different large funds listed in the public release funds such as 500, Kaszek, Techstars, Canary, and many more that seem to have considerable quantity deposits that might not be covered but repay with crisis dividends.
7. Impacts of collective panic might make other banks enter a downfall spiral, leaving many resources changing from bank to bank until the storm calms.
Lifesavers for those in need
Lines of Credit/loans:
- If you have operations in Mexico or Colombia, Kapital launched a quick loan platform for startups that have operations in Mexico or Colombia to continue running operations. They're also launching a payroll advance loan.
- Tranch is offering credit lines to help minimize the impact of recent events on operational spending of up to $500k to pay supplier invoices, including EOR.
- Nitra is providing expedited underwriting for new credit lines and bridge loans outside healthcare - up to $200k on cards and more on a bridge loan.
- Brex is offering emergency bridge loans to qualified SVB customers to help minimize the impact of recent events on payroll and other operational spending.
- Arc is offering short-term credit facilities/bridge loans (up to $250k or current cash position) to help founders make payroll and other working capital needs.
- Capchase is also offering financing for SVB-affected startups.
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Without limiting the foregoing, this information may not reflect recent developments in the law, may not be complete, and may not be accurate in or applicable to your jurisdiction or banking relationship. Because this information is general in nature and may not pertain to your specific circumstances, you should not act or refrain from acting based on any information without first obtaining advice from a professional counselor or other advisers qualified in the applicable subject matter and jurisdictions.