On Wednesday, Silicon Valley Bank was a financially stable entity looking to obtain additional funds.
Within two days, a panic spurred on by the venture capital community SVB had given service to and fostered resulted in the bank’s 40-year-run coming to an end.
On Friday, regulators shut down SVB and took control of its deposits as part of the biggest U.S. banking failure since the 2008 financial crisis and the next biggest ever. The decline of the bank started on Wednesday when it announced that it needed to collect $2.25 billion to strengthen its finances, resulting in a swift downfall for the previously well-liked bank that had been growing with their tech clients.
Following the announcement of a second bank wind-down this week, members of the venture capital community have expressed concern about the role other investors played in SVBs downfall.
Tech Community in Disarray as Silicon Valley Bank Goes Under
Ryan Falvey, a fintech investor at Restive Ventures, commented to CNBC that the event was an “hysteria-induced bank run” caused by venture capitalists, adding that it will likely be remembered as an instance where “an industry cut its nose off to spite its face”.
The current situation is the result of the Federal Reserve using its most intense rate-hiking campaign in four decades to combat inflation. This could potentially have a significant impact on startups’ ability to compensate their employees, venture investors raising funds, and an already weakened sector feeling further pressure.
SVB’s collapse was caused by a decrease in deposits due to a lack of capital, leading them to sell bonds at a loss of $1.8 billion.
After Silvergate bank collapsed, there was a sudden need for fresh capital which resulted in venture capitalists asking their portfolio companies to move funds. The possibility of a bank run at SVB raised the worry that startups might not be able to access their deposits.
During an afternoon call, Greg Becker, CEO for SV Bank, cautioned customers to remain calm amidst a decline in the bank’s stock, which ended trading with a 60% drop. Becker was unable to give assurance that there would not be additional capital raises in the future.
Silicon Valley Bank’s Failure Signals Trouble for Venture Capitalists
By the end of Thursday, customers had withdrawn $42 billion in deposits, per a California regulatory filing.
At the end of the day, SVB had a negative cash balance of $958 million and were unable to acquire sufficient collateral from external sources, as stated by the regulatory body.
Falvey, who left SVB in 2018 to launch his own fund, noted the strong interdependencies that exist within the tech investment world, which may have contributed to the bank’s decline.
In recent days, various prominent funds, including Union Square Ventures and Coatue Management, emailed their entire roster of startups in order to withdraw funds from SVB due to concerns of a bank run. This was further augmented by comments on social media.
Falvey commented that making predictions of certain failure can have a self-fulfilling effect and should be avoided.
TSVC partner Spencer Greene pointed out that some investors had incorrect information about SVB’s position.
Greene stated that there was no liquidity issue until certain venture capitalists labeled it as such, calling the move irresponsible and creating a self-fulfilling prophecy.
Customers Left in Limbo as Silicon Valley Bank Files for Bankruptcy
On Thursday evening, SVB customers received emails to confirm that operations at the bank were continuing as usual.
An SVB banker sent a message to a client regarding the reported market buzz around SVB, which CNBC was able to obtain a copy of.
SVB is continuing operations as normal and if you have any questions or concerns, the banker is available for discussion.
On Friday, SVB ceased its attempt to sell shares according to David Fabert from CNBC. This was partially due to the decrease in deposits, making it difficult for the bank to find a buyer.
On March 10, 2023, a customer was seen at the closed Silicon Valley Bank (SBV) headquarters in Santa Clara, California.
Falvey analyzed SVB’s mid-quarter update from Wednesday, which he stated gave him confidence that the bank was well-funded and could cover all its depositors. He suggested to his portfolio companies that they maintain their funds at SVB despite rumors.
The bank run ended with the seizure of SVB, leaving those who stayed with SVB in an uncertain state for their money retrieval. Deposits insured by the institution are expected to be released by Monday, yet it is unknown when deposits not protected by insurance can be accessed.
The California financial regulator reported that the precipitous deposit withdrawal has rendered the Bank unable to meet its payment obligations, leading to insolvency.
