Other startups chose to bank with SVB because the bank knew the startup ecosystem. Even in the wake of the collapse, startups have sung praises of working with SVB-Ham Serunjogi of Chipper stated, “when I was trying to open Chipper’s first bank account, SVB was the only bank that would accept us.” Some startups used SVB for all of their banking services in exchange for SVB lines of credit. SVB developed extensive relationships with startup companies, providing services like lines of credit and loans to companies that weren’t yet profitable and would have a difficult time accessing services at other banks. What did SVB mean to the startup ecosystem?įrom its outset, Silicon Valley Bank positioned itself as a mainstay bank for the startup ecosystem, courting founders and venture capitalists. And some blame the speed of the bank’s collapse on conversations on social media, arguing they accelerated the run. And SVB was without a chief risk officer for much of 2022. Other factors likely also contributed-the Trump administration raised the threshold designating banks as systemically important from $50 billion to $250 billion, freeing up many smaller and regional banks from annual stress tests and certain capitalization requirements. Even for those companies with insurance through other mechanisms, like cash sweep accounts, companies faced fears they couldn’t swiftly access their money. Many depositors, including startups, often have deposits in their accounts that exceed FDIC insurance limits-when early-stage startups need on average $55,000 to operate per month, it is simply impractical for many startups to split all of their funds amongst multiple banks so that all funds are insured, without creating a headache for operating activities. Chatter swiftly swirled amongst VCs and throughout the startup ecosystem about whether companies should pull their deposits, creating a run on the bank and leading to its collapse. With liabilities in excess of its assets and depositors looking for higher returns, SVB was forced to sell bonds at a loss and was unable to raise the cash needed to remain afloat. As interest rates rose and inflation crept up, the value of the long-term bonds plummeted.
What was once an asset for SVB-clients with brimming bank accounts-soon became a liability, with the majority of the deposits exceeding the $250,000 limit for Federal Deposit Insurance Corporation (FDIC) insurance.
SVB decided to take advantage of low interest rates and park capital in longer-term bonds. At the same time, interest rates hit historic lows and were expected to stay low, barring an unexpected surge in inflation. The bank's clients were flush with cash, and startups raised record amounts of venture capital. Pre-pandemic, as the startup ecosystem thrived, SVB similarly thrived. Silicon Valley Bank situated itself as the bank for the startup ecosystem, counting numerous venture capital firms and startups as clients. While the SVB collapse largely unfolded over 48 hours, the circumstances that lead to the bank being placed into receivership go back months. The journey of a startup is already precarious on any given day-the collapse of a mainstay bank for the startup ecosystem will only make building a startup more challenging. While a divided Congress means legislation is unlikely, banks could face additional regulatory burdens that would have a larger impact on smaller banks, and founders may confront more risk aversion as they seek to access capital. But the fall of SVB has led to concerns that other banks may suffer similar fates, and at the same time has brought to the forefront the risk inherent to the startup ecosystem. SVB in particular was uniquely situated to support the startup ecosystem, offering more favorable terms for loans and connections for founders. Many startups lack access to large banks, and instead rely on community and regional banks to meet their needs. The fall of Silicon Valley Bank (SVB) dealt an immediate shock to the global startup ecosystem and will have lasting ramifications for banks and founders.
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