Silicon Valley Bank (SVB), the go-to financial institution for startups, is facing troubles due to losses resulting from the larger tech downturn. To shore up capital, the bank took steps, causing investors and banking clients to move their money.
Partners at prominent venture firms reached out to their portfolio companies, urging them to pull their money out of the bank, including Peter Thiel’s Founders Fund, Coatue Management, and Union Square Ventures.
Crypto lender Silvergate Capital Corp. announced plans to shut down, and small and medium-sized banks are in a delicate position as they could take a terrible kicking.
On Thursday, the S&P 500 Financials Index had its worst day since mid-2020. Despite this, there was no shortage of tech leaders defending SVB.
However, Ava Labs President John Wu said his company had already diversified away from its reliance on SVB, and recommended others do the same.
On Friday, California regulators closed start-up-focused Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation to take control of the lender’s deposits.
The bank’s client dashboard was also down, and SVB is the first Federal Deposit Insurance Corporation-insured bank to fail in more than two years.
Silicon Valley Bank, or SVB, has long been the go-to financial institution for startups in the Bay Area, with a reputation for making equity investments, sponsoring industry events, and patronizing startups’ services.
However, the bank’s troubles began to surface in November 2022, when Greenoaks Capital Partners’ Neil Mehta sent an email to portfolio companies warning that banks, including SVB, could get caught short due to their offering of higher interest rates to customers.
These interest rates were offered to avoid losing clients to competitors, but institutions were not well-positioned to do this as they had made a large number of long-term, low-interest loans that were still outstanding.
On March 9, 2023, SVB took steps to shore up capital following losses stemming from the larger tech downturn, prompting panic in the startup world.
By Thursday, March 10, the bank’s CEO, Greg Becker, was urging clients to “stay calm,” but many investors and banking clients failed to take his message to heart.
SVB’s stock plunged 60% during the day, shedding almost $10 billion, and then fell as much as 30% in after-hours trading.
Partners at prominent venture firms reached out to their portfolio companies, in some cases urging them to pull their money out of the bank.
Among the firms advising caution were Peter Thiel’s Founders Fund, Coatue Management, and Union Square Ventures.
While SVB’s troubles may have caught some by surprise, skittishness about the bank had been percolating in some corners of the industry for months.
Mehta’s email in November 2022 had already voiced fears that SVB might not be the only bank to stumble. Already in the same week, crypto lender Silvergate Capital Corp. announced its plans to shut down.
On Thursday, March 10, the S&P 500 Financials Index slumped 4.1%, its worst day since mid-2020, and shares of San Francisco’s First Republic Bank fell 17%. Mehta had warned about First Republic in his November email.
Small- and medium-sized banks could find themselves in a particularly delicate position. Rising interest rates have left banks laden with low-interest bonds that cannot be sold quickly without losses.
So if too many customers tap their deposits at once, it risks a vicious cycle. Christopher Whalen, chairman of Whalen Global Advisors, said small banks could take a “terrible kicking.” He added that “Silicon Valley Bank is just the tip of the iceberg.”
Despite Thursday’s chaos, there was no shortage of tech leaders defending SVB, thanks in part to the outsize role the institution has played in the industry. Some urged their compatriots not to abandon SVB in its time of need.
G Squared founder Larry Aschebrook called it “truly unfortunate” that VCs were advising companies to pull out money, “making a tough situation for SVB worse by pressing the panic button.”
Others were less diplomatic. Ava Labs President John Wu said his company had already diversified away from its reliance on SVB and recommended others do the same.
“This is a classic bank run,” Wu said in an interview on Bloomberg Television, “and when the bank run starts, you don’t want to be the last guy there.”
Venture firm Tribe Capital was one of the firms advising its portfolio companies to move some, if not all, of their balances from SVB on March 10.
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