As Silicon Valley Bank was gripped in a crisis last Thursday, General Catalyst boss Hemant Taneja gathered a group of fellow venture capitalists in a last-ditch attempt to avert disaster.
Over the previous few days, some VC funds had leaned on portfolio companies to retreat from the tech scene’s favourite bank, with Peter Thiel’s Founders Fund the most significant to do so, according to people with knowledge of the situation. Founders Fund declined to comment.
“What people were not considering was that if everyone did that you would make the bank unviable,” said Taneja. “By the time I organised the venture community to have a calm and consistent approach it was too late: the [Federal Deposit Insurance Corporation] was already inside the four walls of SVB.”
The immediate crisis for VCs and tech start-ups appears to have passed, after the US Federal Reserve announced emergency measures to support depositors and bolster the banking system on Sunday afternoon.
The relief has made way for a round of bitter recriminations, as VCs contemplate a reckoning: by abandoning a bank that has long been a reliable partner, they had helped to create a gaping hole at the heart of Silicon Valley.
The bank was central to the operations of tech venture capitalists — taking their deposits, writing loans and underwriting deals. It was also a crucial source of funding as a limited partner in some VC funds, while supporting entrepreneurs in myriad other ways, such as providing finance for pet projects such as wineries.
“I wish these very same VCs would have band[ed] together and kept their deposits, their [portfolio company] deposits at SVB and ‘stayed calm’,” said Sanjay Gosalia, head of product at SVB until last year, in a LinkedIn post. “They fundamentally betrayed their partner and have undoubtedly shot themselves in the foot,” he added.
In the 48 hours before the Fed stepped in, almost 500 VCs signed a statement saying they would encourage portfolio companies to keep using SVB if it were recapitalised — though two of the biggest, Andreessen Horowitz and Founders Fund, were both absent from that list.
Some VCs discussed recapitalising the bank themselves, according to a person involved in last week’s talks. Some, including General Catalyst, Khosla Ventures and Greylock, offered portfolio companies low interest loans to make it through until their deposits were freed up.
A different dynamic was playing out in private. On Wednesday, after the bank’s attempts to raise $2.25bn in a stock sale foundered, messages pinged between VCs and start-ups. The run on SVB accelerated as company founders removed funds with the swipe of a finger. On Thursday, customers had initiated withdrawals of $42bn. By Friday, the bank was bust.
“When they did a capital raise, essentially what happened was VCs started advising their companies that, while the risk is low, they might be best served by pulling capital out of SVB,” said Taneja. “As that news spread it essentially created a run on the bank . . . in the world today we’re all online: a bank run doesn’t happen over a matter of days, it happens in hours.”
As soon as SVB’s problems became apparent, Robin Klein, one of the UK’s most active early-stage investors through his firm LocalGlobe, contacted his portfolio companies to offer advice on what he described as “the fundamental principle of treasury management, which is diversification of providers”, and helped them to open accounts at alternatives to SVB, including UK fintechs Wise, Starling, Monzo and Tide.
“I was very cautious not to say ‘take all your money out’, but nor was I prepared to say ‘don’t do anything’,” Klein said. “Some people interpreted that as, ‘He’s trying to stop a run on a bank’. Others might have interpreted the other way around . . . It was a tricky balance.”
One UK founder said that many investors avoided making explicit advice. “They didn’t want to be seen to be leading to a run on the bank,” he said. “But they also weren’t saying ‘leave the money in’, because they knew the existential threat to their portfolio.”
Some VCs were less ambiguous. Arjun Sethi, co-founder of venture fund Tribe Capital, said he had begun advising portfolio companies to pull back at the beginning of last week.
“We had a few companies that were working with SVB around credit lines for their fintech products,” he said. “And [SVB] started becoming less forthcoming. To me, personally it was a signal to reassess the relationship.”
Sethi added: “I got skewered by compatriots in the ecosystem for not supporting SVB. But my job is not to ensure SVB remains solvent. I have a fiduciary duty to my companies. It’s not about causing a run on the bank, but you don’t want to be the last one holding the bag.”
Another venture capitalist said the logic was simple: “If you’re going to panic, panic first.”
SVB’s problems were partly of its own making. Deposits at the bank ran up dramatically during the coronavirus pandemic as its tech start-up customers boomed, and it invested them heavily in long-term, fixed-rate, government-backed debt securities. That left it doubly exposed to rising interest rates, which reversed tech companies’ growth and hit the price of its securities.
Stress tests designed after the 2008 financial crisis to prevent a credit crunch failed to catch the threat from rising rates. But as SVB’s problems came to light, it was the response of venture capital firms that created a fatal stampede.
“There is a story here of how nasty the venture capital and Silicon Valley world is. They killed their relationship bank,” said one short seller who had bet against the bank. “I didn’t think bank runs were going to happen. SVB’s was largely unnecessary and it was stoked by venture capitalists freaking out,” he added.
Many VCs are contemplating a less certain future with their primary bank in the hands of regulators. “The FDIC has done the right thing by protecting depositors, now it’s about making sure the industry has a vibrant bank for its needs,” said Taneja.