The Collapse of Silicon Valley Bank
The bank serving half of all VC-funded startups in the US and UK collapsed more or less overnight. How did it play out, and what is the impact of this event on the tech ecosystem?
It’s been a wild weekend, starting Friday. In case you somehow missed it: we went through the fastest bank run in history, in an event that impacted about half of all VC-funded startups in the US and UK. On Friday night, Silicon Valley Bank (SVB) was shut down by regulators, triggering a weekend of fear and uncertainty for many people and businesses with questions like: “can we make payroll next week?” There was no certainty for startups with money in Silicon Valley Bank.
As of today (Monday) things have calmed down, but it’s not all over. In this special edition, I cover the events of this blow to the tech economy, and what we can expect:
The longer-term impact on the tech ecosystem: startups, VCs, tech workers.
Founded 40 years ago in 1983, Silicon Valley Bank was the 16th largest bank in the US, and the largest by deposits in Silicon Valley. It had $212B in assets under management and more than 37,000 customers, most of them startups and scaleups. The average deposit was around $4.5M per customer. Until Friday, that is, when this number was reduced to zero:
Half of all venture-backed companies in the US used SVB, making the bank the most important financial institution in the US startup tech sector. It wasn’t just startups, but also late-stage companies: 44% of venture-backed tech and healthcare companies which went public in 2022 were SVB customers, according to Bloomberg.
1. Why did so many startups use Silicon Valley Bank?
From a traditional bank’s point of view, startups – especially early-stage startups – are untypical clients. Yesterday, company X did not exist, but today it has $3M and is at a traditional bank wanting to do a few things:
Deposit $3M which they claim is “seed funding” from “investors”
Get company credit cards for some employees
Open a credit line, despite expecting to make zero money for the foreseeable future. In fact, they admit they expect the money to run out, but that they’ll then raise even more, which they call “Series A”
In a traditional bank, this approach triggers all types of alarm bells. Banks need to do extensive know-your-customer (KYC) checks before accepting new clients, and are stringent about extending credit – even a single credit card – for any new business without a credit rating or credit history.
What made SVB stand out is that it understood startups like no traditional bank did. It was well aware a typical VC-funded startup lifecycle starts with a fundraise and a need for access to a bunch of financial services: bank account, additional security for large transfers, credit cards, etc. Later in the lifecycle, startups may need loans, too. An institution like SVB could evaluate credit risk not just on past history, but could decide to open a credit line mid-fundraise, based on term sheets signed. This is something traditional banks would not do.
To give an example of the difference between Silicon Valley Bank and a traditional bank, here’s a comment from Hacker News:
“We had Bank of America offer us a $10K credit card limit when we were discussing keeping over $1M on deposit at all times, simply because we're still running a loss. And they couldn't figure out how to implement two-party control for large transfers. [It] was a headache.”
Can you imagine having raised millions of dollars, with all that money sitting in your account, but being unable to pay $20K/month AWS costs? SVB understood this problem and solved it.
SVB offered a variety of supporting services, including:
Better rates and packages for the business banking needs of startups, from credit cards to more granular permissions for banking operations
Cloud deals that could be worth hundreds of thousands of dollars: up to $100K in AWS credits via the AWS Activate program, and savings of $200K to $1M with Google Cloud via Google Cloud for Startups
SaaS deals that could be worth tens of thousands of dollars: $10K in credits from Freshworks (accounting,) up to 90% off DocSend annual plans, $2,000 Airtable credits, $1,000 savings for a Notion team plan, 25% off Vanta (security,) 20% off Zoom, 65% off BlueJeans (video calling,) 3 months free with Gusto (payroll,) and dozens more offers
Networking events with investors and founders. For example, SVB ran the Meet the Investor series for early-stage companies to get introduced to investors and also events like Series A Founder Masterclass for founders.
Private financing for founders and leadership teams, allowing these people to take loans against their company stock for things like mortgages, collateralized lending - including for private aircraft financing (!). Silicon Valley Bank was unique in offering such services: which loans allowed for founders to borrow amounts that would have not been possible at other banks, without the company going public first.
Finally, one of the most important reasons why startups chose SVB: VCs recommended it. If you’re a brand new startup and your investor hands you a bunch of money, and recommends a bank that’s best for startups, with offers perks no other bank matches: then why wouldn’t you?
2. Thursday: Bank run
On Thursday, 9 March, we witnessed the fastest bank run on record.
What is a bank run?
This is when customers show up at a bank to withdraw all their money, due to lack of confidence that their funds are safe. The issue is that banks (not only SVB) aren’t designed to work like this: they cannot fulfil simultaneous requests for withdrawals by all (or even most) customers. Basically, a bank doesn’t have everyone’s money easily to hand, locked up in a vault. This is because when you make a deposit with a bank, it uses some of your money for a variety of purposes:
Loans to other customers as credit
Short-term and long-term investments
Some is free-floating, available to customers
If a large percentage of customers suddenly want their money, a bank can do this to the extent that their free cash flow allows. Beyond that, longer-term investments need to be unwound: potentially breaking up long-term bonds that they bought, or their selling of debt they hold to other institutions. Breaking up or selling off any long-term investments may come at a loss, and there’s a danger the bank may still not have clawed back all customer deposits, meaning some could lose money.
In a bank run, only those who act first secure their funds. Those moving later might not get all their funds and could even lose some of their holdings. This is why even talk about bank runs can be hazardous: if you hear a bank run is starting, the rational move is to minimize your losses by getting your money out, which helps make the run a reality.
Bank run at SVP
Thursday, 9 March, Around 9am in the morning (PST / California time), founders were tipped off by venture capitalists that SVB looked in trouble. The investors suggested companies immediately withdraw their funds for safekeeping, while still possible. From here, things accelerated.
11am: Bloomberg reported that Founders Fund, a VC fund co-founded by Peter Thiel, advised all its portfolio companies “to pull money from Silicon Valley Bank.” This news is widely shared on social media and in private messages.
11:30am: SVB CEO, Gregory Becker, holds a 10-minute conference call with top VCs, saying the bank has “ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge.” According to The Information, the CEO said:
“I would ask everyone to stay calm and to support us, just like we supported you during the challenging times”
12pm (noon): Details of the call leak, and focus shifts onto the CEO’s quote: “If everyone is telling each other SVB is in trouble, that would be a challenge.” On social media, founders share that they are observing a bank run to be unfolding. This news naturally fuels the run.
From 12am: VCs tell portfolio companies to pull money they have in Silicon Valley Bank. The bank’s systems start to be overloaded to the point of customers not being able to log on and transfer.
We were witnessing a full-on bank run unfold in a matter of hours, bank customers transferring out all their holdings.
In the aftermath, we would learn that Silicon Valley Bank processed $42B in deposit outflows on Thursday: which is nearly a quarter of all deposits they held!
“Thursday, 9 AM: in one chat with 200+ tech founders (most in the Bay Area,) questions about SVB start to show up.
10 AM: some suggest getting the money out of SVB for safety. Only upside. No downside.
10:50 AM: I read the messages in a bathroom break. Immediately cancel the meeting I had. Ask my wife, Tania, to wire all of our personal money out to other banks. Call my teams. Ask them to do the same. One of them, at the dentist, has to stop the procedure and run home. (...)
~12:00 PM: All of my chats with tech founders in the US light on fire with what’s happening. Obviously, we have a bank runoff. Surreal.
12:30 AM: We request two wires for all the money from the 2nd company to Mercury.
12:38 PM: Wires to Ameritrade clear. The 1st company is safe. (...)
~3:00 PM: My chats with tech founders from Latin America start to catch up.
4:05 PM: SVB calls us. Tells us that our savings will be wired the same day, as requested.”
3. Friday: Downfall of SVB
On Thursday afternoon, several startup founders I know got the memo to move their money, but they couldn’t log into SVB and do transfers. Most planned to transfer funds out the first thing Monday morning. Some founders even showed up at the offices of Silicon Valley Bank in San Francisco. As fellow Substack authorreported:
“Founder Dor Levi, a former Lyft executive, first texted me at 8:16 a.m. from outside Silicon Valley Bank’s New York offices.
He said he’d been instructed by a banker at Silicon Valley Bank to go and get a cashier’s check from the New York office if he wanted to move his funds.
Levi wasn’t the only founder who showed up at SVB’s offices looking to pull his money from the bank. “There’s more founders coming every minute,” Levi texted. He said about a dozen founders showed up at the bank this morning.”
The founders showing up at the bank in person couldn’t withdraw their money. In fact, no one could.
On Friday morning, the Federal Deposit Insurance Corporation (FDIC,) announced it was closing the bank. The FDIC is a government agency whose goal is to maintain stability and public confidence in the US financial system.
The FDIC stated “all insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023.” This meant companies had guaranteed access to $250K on their account, but everything else was uncertain.
This was bad news and the implications were just starting to become clear.
4. Saturday: Reactions and preparing for bad outcomes
By Friday midday, it was less than 24 hours since SVB was the largest startup bank, to a state of collapse. Customers not quick or lucky enough to transfer their money out had their accounts frozen for all of Friday, and could only hope to access $250K in deposits. This may sound like a lot for a personal account, but for a company with 30 employees on $150K each and monthly AWS costs of $100K, it would barely cover 2 weeks of wages and infra costs.
As a result, making payroll was looking like a huge problem for many companies. For tech startups, the biggest expenses tend to be:
Infrastructure and vendor costs
There’s a good reason why these same tech companies have been doing layoffs and aggressively cutting back on vendor spend: it’s because staff payroll and infra vendor costs are the bulk of their expenses. In the US, payroll is every two weeks and most startups had a payroll cycle starting this week (the week of 13th March) In contrast, in the EU payroll is typically monthly.
I talked with a well-connected founder, who said::
“My WhatsApp is insane with SVB. 4 founders I know won’t make payroll unless they can bridge somehow. They are literally asking me for personal loans.
My inbox is a bloodbath.”
Garry Tan, CEO of Y Combinator stated how “30% of YC companies exposed through SVB can’t make payroll in the next 30 days.”
Given payroll was the immediate priority, founders for whom $250K wouldn’t cover the payroll jumped into action, reaching out to VCs for bridge loans, and asking friends and family to loan enough so they could pay staff.
Employee-of-record (EOR) payroll companies such as Remote, Deel, Rippling found themselves in a challenging situation. These companies are hired by startups to manage payroll in countries where a startup is not a legal entity.
Rippling, a popular payroll provider which also provides payroll, was immediately impacted because it used SVB to transfer salaries. When SVB went down, Rippling could no longer make these payments, so it rapidly switched over to JPMorgan Chase to make payroll, but warned customers that payroll might be late as a result.
Meanwhile, other EOR providers have assured customers that their staff will get paid, even if customers won’t be able to transfer payroll the next week. On Saturday, Remote confirmed it was still making payroll - even if customers cannot transfer funds - and on Sunday Deel announced it will support impacted customers.
EOR providers are in a tight spot themselves, as legally they cannot fail to pay employees in some countries, due to employment law. At the same time, with so many customers having had their accounts frozen, these providers could potentially have liquidity issues, meaning EORs could have had problems making payroll.)
Vendor payments for the coming week were looking to be at risk by Friday. For any startup with funds stuck in SVB, they had to budget the $250K they could access, and do so wisely.
Other vendor expenses were arguably secondary until startups could access their full account, so founders were debating asking vendors to defer payments, given the unprecedented situation.
Several vendors were proactive, offering payment support. On Friday, project management app Linear announced it would grant payment delays. On Saturday, error logging service Sentry followed suit, and PaaS Vercel did the same.
For some startups, losing access to their bank account prompted drastic action. While startups with relatively small expenses hoped to ride out the coming weeks on the insured $250K: for larger companies with all their funds tied up, this wasn’t an option.
One example of this is Camp.com, a company selling themed toys for all ages. Responding to its bank account being frozen, the startup launched a site-wide 40% off sale, with this popup displaying to all visitors:
A 40% discount is huge for a store like Camp, which sells physical goods. A site-wide 40% most likely means the company was selling everything at a loss, in a desperate bid to generate cash flow and continue operations while the bank account was inaccessible.
The campaign and the cheesy graphic worked: Camp saw 35x the normal traffic, and – presumably – several times the sales.
Founders were fearful of a liquidity crunch and the effects it could have. By Saturday, it was understood the FDIC would move swiftly in selling SVB’s assets and aim to return deposits as fast as possible. The question really was: how fast? Was it possible by Monday?
In the early hours of Saturday, a message circulated in VC circles, claiming the FDIC had already sold about half of SVB’s assets, and planned to make 50% of deposits available by Monday, with the other 50% likely to be recovered in 3-6 months.
While this was better news than having access to only $250K, it still forecasted grim news and a liquidity crunch. After all, if 50% of a company’s reserves disappear, it will need to do drastic cost-cutting measures like refusing to pay non-essential vendors, laying off staff, and cutting down on expenses for up to 6 months until the deposits are returned.