A Brinks armored truck is parked in front of the closed headquarters of Silicon Valley Bank (SVB) on March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
On Wednesday, Silicon Valley Bank was a well-capitalized institution looking to make money some capital.
Within 48 hours, a panic caused by the venture capital community that SVB had served and nurtured ended the bank’s 40-year run.
Regulators closed SVB on Friday and seized its deposits in the largest US bank failure since the 2008 financial crisis and the second largest on record. The company’s downward spiral began late Wednesday, when it surprised investors with news that it needed to raise $2.25 billion to strengthen its balance sheet. What followed was the rapid collapse of a highly respected bank that had grown along with its technology clients.
Even as the dust begins to settle over the second bank run-off announced this week, members of the VC community lament the role other investors played in SVB’s demise.
“This was a hysteria-driven bank run caused by VCs,” Ryan Falvey, a Restive Ventures fintech investor, told CNBC. “This will go down in the books as one of the ultimate cases where an industry cuts its nose off to resist its face.”
The episode is the latest record of the Federal Reserve’s moves to curb inflation with its most aggressive rate hike campaign in four decades. The ramifications could be far-reaching, with concerns that startups may be unable to pay workers in the coming days, venture capital investors will struggle to raise funds and an already battered industry could face a deeper slump.
The causes of the collapse of the SVB stem from disruptions caused by higher rates. As early-stage clients took deposits to prop up their businesses in a chilly IPO and private fundraising environment, SVB was short on capital. It was forced to sell all of its available-for-sale bonds at a loss of $1.8 billion, the bank said late Wednesday.
The sudden need for new capital that followed the collapse of the crypto-focused Silvergate bank led to another wave of deposit withdrawals Thursday as VCs directed their portfolio companies to move funds, according to those in the know. The concern: A bank run at SVB could pose an existential threat to startups unable to tap into their deposits.
SVB clients said they lacked confidence after CEO Greg Becker urged them to “keep calm” in a call that began Thursday afternoon, and the stock’s slump continued unabated, reaching 60% by close of trading. Importantly, Becker failed to assure audiences that the capital raise would be the bank’s last, one interlocutor said.
Falvey, a former SVB employee who launched his own fund in 2018, pointed to the highly interconnected nature of the technology investment community as a key reason for the bank’s sudden demise. Prominent funds, including Union Square Ventures and Coatue Management, have been sending emails to their entire roster of startups in recent days, urging them to withdraw money from SVB over concerns of a bank run. Social media has only increased the panic, he noted.
“If you say, ‘Hey get your deposits out, this thing is going to fail,’ it’s like screaming fire in a crowded theater,” Falvey said. “It’s a self-fulfilling prophecy.”
A customer stands outside a closed Silicon Valley Bank (SVB) headquarters in Santa Clara, California, on March 10, 2023.
Justin Sullivan | Getty Images
Falvey, who began his career at Wells Fargo and consulted for a bank seized during the financial crisis, said his mid-quarter analysis from SVB update gave him confidence. The bank was well capitalized and could make all savers healthy, he said. He even advised his portfolio companies to keep their money with the SVB as the rumors spread.
Thanks to the bank run that ended in SVB’s repossession, those who remained with SVB now face an uncertain timeline for getting their money back. While insured deposits are expected to be available soon, the bulk of the SVB’s deposits were uninsured and it is unclear when they will be released.
This story is evolving. Check back later for updates.
