Hundreds of Startups Face Massive Cash Crunch in Wake of Silicon Valley Bank Collapse
One hundred venture capital and investing firms have signed a statement supporting Silicon Valley Bank, and calls for aid to avoid a possible “extinction-level event” for tech companies.
Hundreds of startup companies are facing a potentially massive cash crunch in the wake of the collapse of Silicon Valley Bank (SVB), an institution designed to help finance such venture capital (VC) firms.
In a tweet, founder Nikita Bier said: “The number of growth stage companies that had their cash at SVB is huge. Making payroll next week is going to be a s—show.”
Sam Lessin, a partner at Slow Ventures, told CNBC Friday a founder he had spoken to planned to cover payrolls personally and “figure it out from there.”
Even startups that didn’t bank directly with SVB have been hit by its collapse. My Insider colleagues April Joyner and Madeline Renbarger reported the healthtech startup Flow Health used Rippling, which held an account with SVB, as its payroll provider.
“We literally have no way of paying employees right now,” Flow Health CEO Alex Meshkin told Insider.
Some startups took drastic steps on Friday to try and bring cash in. The popular toy store Camp told its customers it was in distress after its funds got trapped by the collapse.
“All of our cash was at SVB and we are trying to build up our balance at Chase,” Camp CEO and cofounder Ben Kaufman told Insider via Twitter direct message.
The impact is being felt throughout California, as there appears to be another bank run poised to occur in Brentwood.
BREAKING: Lines have allegedly formed outside of a First Republic Bank branch in Los Angeles, California:
"I’ve never seen a bank run in Brentwood Los Angeles in over 40 years . . . people [are] standing in the rain" pic.twitter.com/qxGuugx5Ub
— Upward News (@UpwardNewsHQ) March 12, 2023
It appears the term “Extinction-Level Event” may actually be warranted in this case.
More than 100 venture capital and investing firms have signed a statement supporting Silicon Valley Bank, part of mounting industry calls to limit the fallout of the bank’s collapse and avoid a possible “extinction-level event” for tech companies.
As of Saturday afternoon in San Francisco, about 125 venture firms including Sequoia Capital had signed on to the statement, spearheaded by venture firm General Catalyst, according to a person familiar with the matter. First released Friday by a smaller group of signatories, the statement called the events of the last two days “deeply disappointing and concerning,” and said that the investors would continue relationships with the institution if it were bought by another entity.
Also on Saturday, the startup incubator Y Combinator posted a petition signed by hundreds of founders and chief executives to US Treasury Secretary Janet Yellen and other regulators, asking for “relief and attention to an immediate critical impact on small businesses, startups, and their employees who are depositors at the bank.”
The petition asked for small businesses that had deposited funds at Silicon Valley Bank to be made whole, and for Congress to “restore stronger regulatory oversight and capital requirements for regional banks.”
A scheduled Saturday afternoon briefing for members of California’s congressional delegation by officials from the Federal Deposit Insurance Corporation was reportedly postponed.
The Northern California bank’s Friday collapse marked the nation’s largest bank failure since the 2007 financial crisis and has raised concerns about ripple effects throughout the rest of the economy.
Rep. Ro Khanna (D-Calif.), who represents Silicon Valley, said early Saturday on Twitter he wanted to ensure the bank’s depositors would be protected.
“The Treasury Department and FDIC must communicate loudly and clearly that depositors will be protected,” he wrote. “The investors and executives of SBV should bear risk and lose. But this should not mean that workers go without paychecks on Monday or small businesses collapse.”
Between the flooding and the bank collapse, it has been a very bad week for California. I cannot stress enough how dependent the state has become on the golden eggs of the Big Tech goose.
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TY Leslie
Twitter is a strange place.. I bumped into someone whose new company was hit hard.. here, if you are interested..
https://twitter.com/doyouknowchamp/status/1634399526868905984?s=20
This will happen again if the government bails out SVB. They keep happening largely because depositors and customers have too much confidence that the government will bail them out. There is no such thing as “risk free” anything. Corruption and incompetence has a price and WE pay it either in higher taxes, higher prices, bad products and services,…. In other words, we become a 3rd world perpetually failing economy.
I’ve been saying for many years that by the time this is over, someone is going to have to eat a lot of shit. We have arrived at that time and we have largely exported our hopes of not having to eat most of it. This is what eating shit looks like. Who would you prefer eats it? You? Or the people who are responsible for it?
This is where intelligence would come in, if the administration had any. Bail out everybody. They weren’t banking there for yield, so that point of structural instability isn’t involved. They’re hurt because the Fed required buying Fed bonds and then raised interest rates – which would still be okay, except somebody started a run on the bank.
No, don’t bail them out.
Allow a takeover that guarantees the deposits….or just do the work of FDIC, close the bank, and secure the deposits.
Also, make sure that this woke idiot in charge of risk management never works another day in a position of importance. Burger King could use another grill technician.
Bail out? Absolutely not. No way in hell. The people who run these companies should understand the basics of risk management. If they don’t, it’s on them.
If your heart bleeds fit them, start up a GoFundMe for them. But not one goddamn dime of taxpayer money.
I don’t have tons of money, and I don’t make payrolls anymore, but even now I’ve got my pennies diversified.
Write them a check from your own personal account, keep your damn hands off mine.
The deposits up to $250K are guaranteed by FDIC. The amounts above that are not. Depositors have to be willing to accept their own responsibility in choosing to place funds above that in a bank. The depositors also must accept responsibility for choosing this bank out the many to do business with.
The risk profile of every bank varies widely. The management of a particular bank by its officers and directors must be made to matter. If we bail out folks for making bad decisions then we do nothing but encourage bad decisions in the future b/c we underwrite the foolish.
No bail out. At most the remaining CA banks could work up a plan to provide emergency loans to some of the business for payroll and normal operating expenses while the FDIC /regulators work through receivership.
Bank Regulations require each bank to have an existing plan for bank failure to accommodate the transition. Regulators are supposed to review and sign off it to ensure it is workable.
No bailouts. No more moral hazard. If we refuse to allow natural consequences of bad decisions to unfold then the market isn’t working. The self entitlement of these tech goons and their tame politicians demanding an exceptional intervention to save their asses is beyond contemptible.
I concur. I read an article yesterday that stated that 93% of deposits were not covered under the FDIC requirement. I will check and provide a source n
I believe that’s correct for the total amount on deposit. The account breakdown is approx 52% of accounts have more than $250K while 48% have less.
Follow up.
Pasadena Phil posted a Breitbart link onto Leslie’s column from yesterday stating that 90 to 93% of deposits were not covered by FDIC.
Perhaps the Feds need to go after the shareholders and the executives who paid themselves big dividends and sold their shares prior to the collapse. Also claw back all bonuses from employees of the bank.
It was done for Bernie Madoff’s House of Cards, so it can be done here.
But many of the depositors knew they were not covered, and should not be bailed out for their high risk ventures. When the ball drops on your number you win. When it drops on another number, you lose. Your risk. Not mine.
In fairness some of that is business accounts and they are going to be larger than individual accounts. Still they did pick this bank and its mangers, officers, directors and philosophy towards risk v the many other banks in existence. At the end of the day the depositors choices have to have consequences.
Also in fairness, a lot of those people and companies relied on sources like Forbes to provide useful, accurate assessments of banking facilities like SVB. Forbes, though, like Cramer was spectacularly wrong in their assessment of SVB, issued only about a month ago.
txvet2,
If the extent of the depositors research on SVB was listening to Cramer and reading Forbes that’s damn poor due diligence. The data is all out there in quarterly and annual filings and reports to regulators. One aspect of this is the CEO’s public lobbying to raise the threshold for higher regulatory scrutiny from $50 Billion to $250 Billion; which he got from regulators in 2019. When the folks running anything ask regulators not to look to closely it should be a reg flag for the prudent.
IMO the real problem here re contagion is the infrastructure of Silicon Valley. The tech industry has been basically bullet proof for years. They have sloppy management and poor discipline. That mindset spreads outward to other local CA businesses. Zero interest rates for years on end = cheap money to finance all sorts of dumb ass ideas. VC had so much money they shoveled it out.
That sloppiness is now showing up with the bill for the decades long party. Some these folks haven’t had to face too many consequences in business. There’s folks who move from one failed startup to the next for years; they always find a soft place to land. With cheap money to backstop this it worked. Now we have a far different interest rate environment and many are unprepared.
Banks complacent as well. Why haven’t they upped savings account rates to something closer to a 2 year Treasury? They got complacent about deposits staying put at low rates. They didn’t think they needed to raise their rates to retain depositors. Well that’s one likely change on Monday. Plenty of folks are going to move money around to higher yielding accounts as they shop for a second or even substitute bank. No physical lines needed like the ’20s just use the app on the phone to set up a new account and transfer funds.
Sorry, Chief, I don’t buy it. How many people do that kind of research before they open a bank account or take out a loan? We’re not talking about investing in the bank, where that kind of “due diligence” would be expected. Cramer is an idiot and has been for the 30 years or so that I’ve been investing – but Forbes is a well respected and supposedly trustworthy rater of financial institutions – or at least it was until this fiasco.
txvet2,
There are plenty of fee only financial planners out there who can help you navigate all this for a flat fee no commission.
If someone is too cheap or too stubborn to fork over $ for assistance the filings are public and the internet is free at the public library so there isn’t an excuse of cost.
Moreover the depositors at SVB, well over 90% of them anyway, are by definition ‘sophisticated investors’. The business account deposits include lots of Venture Capital firms. These aren’t mom and pop who got scammed. These are folks who got complacent that the world doesn’t change.
Forbes has been shit for years IMO. Cramer is so awful there are not only memes but someone started a fund to run as a contrarian to Cramer’s advice.
Where you choose to deposit money is just as important as what stock or bond you buy. At the end of the day we must bear the consequences of our decisions.
If we do as you seem to advocate for here then we refusing to punish vice. Instead we are rewarding vice. That’s not a good message to send. Why should those who were prudent pay for someone else’s frivolity?
At root this is basic grasshopper and the ant. The rest is excuses dressed up with rhetorical flourishes to disguise lack of prudence.
But this is California…. and the majority of depositors are Dems… so they must be saved. What was that? Oh… taking a page from The View…. “they voted for Brandon… so they deserved it.” One more remnant of the loose banking system. Or is this planned by the Dems to gain more control over Congress?
Must they? If so I am pretty sure folks will notice the disparity between treatment of those impacted by this event and say E Palestine.
Deposits in excess of the FDIC guarantee limit will eventually be returned to depositors. Worst case is about 75 cents on the dollar, best case is 93/94 cents on the dollar. They get 100% of deposits up to $250K, that comes pretty quickly. The excess deposits can be up to a couple years, more likely is well under a year.
What they need is access to short term credit lines for the business accounts to handle operating expenses. That and getting the FDIC portion out the door to depositors rapidly. The Fed has already opened up the discount window to provide liquidity to stave off any other bank run problems.
As long as the wider public doesn’t panic this is solvable and over quickly. The problem though is the demand by SVB depositors via Congressional delegations to be immune from consequences. They don’t want to take a haircut which is understandable but from a PR standpoint this is long-term foolish. The broad National public doesn’t hold much sympathy for CA, for Silicon Valley, tech firms, woke weirdos and especially not venture capital moguls.
Bailing out these folks is politically stupid for d/prog. All it does is help the more populist modern GoP and a certain guy named Trump.
“The deposits up to $250K are guaranteed by FDIC. The amounts above that are not.”
And if (as some believe) this is just the tip of the spear to come, heralding an epidemic of bank failures, keep in mind that at some point FDIC’s “guarantees” run out of actual money to back them up, and you are left holding the bag, insurance or no insurance.
It’s being reported a lot of places that literally the last thing the bank did before being taken over and having accounts frozen was to pay out annual BONUSES to employees. The level of sociopathic hubris to pay BONUSES to employees literally the day your company collapses just destroys my brain.
Meanwhile that morning in NYC they had CALLED THE POLICE on companies and people trying to withdraw their money from the bank.
People need to go to prison over this.
.
BWAHAHAHAHAHAHAHAHA . . . you’re joking, right? When have any of the people responsible for this kind of thing ever gone to jail over it. Nope, from what’s been reported the CEO of SVB sold $3.5 MILLION in stock TWO weeks before the bank’s collapse and SVB bank executives have been dumping stock at least since 2021. The FDIC will bailout the bank with taxpayer money (and to hell with the $250K limit), the executives will disappear just like Bankman-Fried (really, what happened to SBF) and it will be all swept under the carpet as if it didn’t happen. But anyone going to prison? Yeah, that’s about as likely as finding a virgin in a maternity ward. Not gonna happen.
Silicon Valley Bank CEO Sold $3.5 Million in Stock 2 Weeks Before Collapse
Don’t forget about all of the top level players selling off their stock.
This is a crooked bunch.
LM beat me to it.
The CEO of that bank was obviously a dipshit to be so heavily exposed to long term bonds purchased with short-term deposit money.
However, regarding his stock sale I read an article which stated that was a pre-planned trade timed to the vesting date of some options he had received. If that is true then the timing of the trade isn’t nearly as fishy as it first appears.
Moral hazards for thee, but not for me.
Golly, if only there was some powerful legal authority that could employ thousands of people for many decades who could write and enforce ponderous tomes of regulations on banks to ensure this type of financial catastrophe doesn’t happen.
If only….
Where were all these regulators when this was falling apart?? Looks like they were collecting info on gun purchases.
That, and collecting payola in the form of Democratic Party campaign donations. Of course, with a healthy dose of Republican Party participants.
I will support a bailout and protection of unsecured deposits, but ONLY AFTER every small business that was destroyed by the Shamdemic is made whole again.
Then we can consider bailing out the woke Silicon Valley employees who generally hate most Americans.
Their collapse was based on poor decision making and the failure of this administration to secure our monetary policy and control inflation.
Good luck.
And ONLY AFTER they claw back the bonuses the bank paid out as literally the last action they took before they were frozen.
I concur. They also need to retrieve the money from the executives who sold their shares just before the collapse.
Venture capitalist should never be bailed out. The risk is tied to the premium they charge for their services. The people who are owed money, like Etsey users, will eventually get their money back when assets are sold (the Fed has stated there are plenty of assets to do this). Investors took their risks in an uninsured chance to gain higher yields. My wife and I made our money without being this stupid or greedy.
They want the high reward without the high risk
Tech companies have been fat hogs for years because of the prevalence of free money.
Watch a couple of the ‘day in the life of a tech worker’ INSANITY going on. A luxury cafeteria that’s free for employees despite the fact that most of them were ‘working’ from home, crap like ‘meditation rooms’ and free yoga classes, wine/beer on tap in the middle of the week (also free).
These companies never actually cared about making money because in the Trump economy they didn’t have to worry about it.
Now they’re in the Biden crash and banks and investors can no longer underwrite their insane practices.
They were long overdue for a huge crash.
And they need to feel the pain associated with the collapse.
The IRS will handle the bailout by fleecing taxpayers at gunpoint.
The new IRS agents will have a goal. Increase Treasury revenues by $700 billion.
That’s about $8,100 per new agent. I am sure they can squeeze Mom & Pop stores and restaurants like the mafia did in days of old.
Maybe they’ll start going after churches and other non-profits.
Sorry. I was doing Democrat math on this one. That’s $8 million per agent. Still a walk in the park for an armed agent bent on acting like the Sheriff of Nottingham.
A bunch of VC’s asking for a bailout? No thank you. Organize a VC fund that will buy SVB assets at 75 – 80 cents cash on the dollar. If the asset recovery value is really 98% then they will get a nice return while doing the public “good” of keeping the threatened businesses alive (albeit with a significant haircut). But I have had it with private profit, socialized loss
As I understand it, SVB has/had the assets to cover all their deposits. The problem was cash. That they didn’t have and they didn’t have time to liquidate the assets to civer the withdrawals.
As far as I know, those assets still exist.
No bank has the cash to cover their deposits. They allowed to loan out a multiple of the deposits and maintain a minimum reserve. Banks are also expected to conduct stress tests at least annually as part of their internal risk management. They discovered that their reserves were about @$2.5B short and by announcing they were trying to raise the amount, that triggered the events that led to the bank run and took them down. This strongly suggest they had the wrong asset mix in their reserves. When faced with having to liquidate those assets at market prices, their stated reserves were far from adequate.
So it was a liquidity problem. Too many of their assets were not marked to market which is legal but I would assume would have to be taken into consideration when conducting stress tests. I can’t understand why they are not required to report their liquidity reserves at market value. What’s the point of stress tests if they don’t reflect reality?
Yup, they were very heavily exposed to treasury bonds and rock-bottom rates. Then rates started to rise. Whoops. Another example of the ‘smartest guys in the room’ screwing the pooch.
The behavior of the leadership of SVB (selling their stock, giving themselves bonuses) potentially indicates that they knew perfectly well the bank was going to fold.
How long have they known? What did they do to prop it up? Did they lie to investors, shareholders or regulators during the period of weakness?
Those questions need to be answered completely and soon. And then if there are no prosecutions, there will be more pointed questions to answer.
Based on the above I conclude posters haven’t taken the effort to look at the economic facts that brought this about … and instead want to bitch about Californian’s. It’s real simple … do nothing and you risk spreading of the contagion … sure uninsured SVB deposits will be lost and boy have you taught then a lesson … but at the risk of taking out other people unassociated with this all over the nation in terms of interest rates, lost jobs, devaluation, slowed economy etc. Don’t do something about this and it can get real bad real fast for all of us. Yes … moral hazard is something to worry about … but how many times are you willing to take it in the ass just to get your revenge in the name of teaching them a lesson?
Way off base here. This wasn’t the result of huge outside and unforseen forces acting in concert. This is an old fashioned liquidity problem; bank run. The result of poor due diligence by depositors, cavalier risk management by officers of SVB, complacency by the Board of SVB. Yes there were rising interest rates. However, nothing made the management choose to draw down cash reserves and place that capital into other investments that were illiquid. They did that on their own hook.
Ultimately this occurred b/c of a lack of sufficient ‘cash’ reserves at SVB. That stemmed directly from the decisions of the management, officers and directors to gain a higher rate of return on that cash by putting it into illiquid assets; longer duration treasury instruments and loans.
And the contagion risk is due to lack of confidence in the Fed and Treasury. Bank runs can take down the good banks too. This has become a broad systemic crisis infecting everything in the “civilized” world since the grown ups were pushed aside to make room for the bratty children now running things.
The government steps in to “fix” things and everything immediately becomes a game of whack-a-mole as problems explode faster as the quick “fixes” don’t fix the key problems: too much government. too much wasteful spending, lawlessness everywhere….
SVB hasn’t had a Chief Risk Officer for almost a year,
https://www.breitbart.com/economy/2023/03/12/report-svb-had-no-chief-risk-officer-nine-months-before-collapse-uk-based-risk-head-focused-lgbtq-initiatives/
Tells you how negligent they were about the core responsibilities. But diversity is their strength so…
Interestingly, the people in the institutions who are signing petitions in support of SVB aren’t saying that the banking industry needs to bail out SVB, or that they should collect donations to help out SVB.
They’re signing a petition saying that the government should take money from the citizenry under threat of violence to bail out an institution that made poor investment choices and suffered the consequences.
And guess what? My prediction: this administration will do it.
Remember “too big to fail?”
History is rhyming again.
So, I was out of town over the weekend and am just catching up on all the news and blogs that I missed. When I left the above comment, I hadn’t gotten to the posts announcing that – surprise – the government would, in fact, be bailing out SVG. This is my shocked face.