Silicon Valley start-ups are scrambling to pay staff and identify sources of back-up funding after regulators stepped in and shut down Silicon Valley Bank on Friday morning, stranding deposits that serve as the lifeblood of many early-stage technology companies.
The bank was the 16th largest in the US and a central part of the Silicon Valley ecosystem, serving roughly half of all venture fund-backed technology start-ups and many of their investors.
It is now in the hands of receivers at the FDIC, leaving deposit holders to contend with immediate operational issues and fret over the possibility that their cash could be out of reach for weeks or months.
“This is an *extinction level event* for start-ups and will set start-ups and innovation back by 10 years or more . . . All little start-ups, tomorrow’s Google’s and Facebooks, will be extinguished if we don’t find a fix,” Garry Tan, president of prominent start-up accelerator Y Combinator, wrote in a tweet on Friday.
“30% of YC companies exposed through SVB can’t make payroll in the next 30 days,” he added.
The issue is particularly pressing for smaller companies without large cash reserves.
“Right now everyone is figuring out if their payroll will go through if SVB is supposed to be paying,” said Zach Coelius, a venture capital investor in early-stage companies, many of which exclusively bank with SVB.
“There’s a lot of money that flows through those bank accounts every day that suddenly is not moving. There will be big consequences for the whole ecosystem. Employees getting paid, suppliers getting paid, financing [rounds] closing.”
Rippling, a payroll software company used by start-ups and that relied on SVB’s payment network, moved swiftly to avoid disruption as the bank’s position worsened over Thursday, accelerating a planned shift of its payroll processing to JPMorgan’s infrastructure.
But it could not act quickly enough to ensure start-up employees were paid as usual on Friday, as SBV’s efforts to raise new capital foundered and account holders raced to move deposits out of the bank. The FDIC later announced it had taken over the bank.
“Pay runs in flight for today out of SVB have not been paid,” Parker Conrad, the company’s chief executive, wrote on Twitter on Friday morning.
“The latest we heard from SVB this morning was that this was an operational delay and funds will be released. However, FDIC involvement makes us sceptical of the assurances we are getting from SVB.”
One founder whose company has about $100,000 locked in an SVB account was working out how to pay his staff on Friday. “We will eventually get [deposits] back but now the government is involved it could take weeks — that could cause operational issues. It’s not good,” he said.
Deposits of up to $250,000 are federally insured but the majority of SVB clients fall outside that threshold. The bank reported at the end of last year that $151bn of its $173bn in total domestic deposits was uninsured. The FDIC said clients will get access to insured deposits by Monday morning, while uninsured depositors will get an advanced dividend and a receivership certificate for anything above that sum.
Start-ups and investors rushed to pull funds from SVB on Thursday and open accounts at rivals including JPMorgan and specialist banks such as Mercury and Series Financial. But SVB’s central position in the tech ecosystem will be harder to transfer. As well as holding deposits, the lender underwrites tech IPOs, bankrolls entrepreneurs’ pet projects and hosts regular events in California.
The impact is being felt beyond start-ups. Roku, the $24bn streaming hardware group that went public in 2017, disclosed on Friday that more than a quarter of its $1.9bn in cash and equivalents, about $487mn, were deposited at SVB. It said it was uncertain to what extent it would be able to recover the uninsured portion of the funds.
Deposit holders interviewed by the Financial Times were hoping for the bank to be bought out of receivership and for a new owner to reopen accounts and resume lending. But if no buyer is found, they feared the situation will deteriorate further.
One VC said it was fielding calls from nervous start-up founders who wanted advice on how to communicate the payroll issue to employees and feared they would have to start laying people off if no buyer for SVB could be found in the next few days.
Coelius said he and other investors were preparing to write short-term loans to portfolio companies to tide them over if deposits still cannot be accessed on Monday. But, he added, “there will be companies which will die faster because they don’t get a chance to figure it out”.
Additional reporting by Patrick McGee