Life was already tough for startups. Funding fell to a five-year low, venture capitalists were getting angry, and wealthy angels were hoarding their money instead of handing it out like candy. Then Silicon Valley’s own bank closed its doors, freezing salaries and forcing the founders to stop running their businesses and focus on the only thing that matters: cash flow.
When the nexus of entrepreneurship awoke Monday morning after a weekend filled with uncertainty, they learned that while Silicon Valley Bank may not be saved, the deposits it holds are safe. That’s not to say that the countless emerging companies aren’t, however, the lifestyles enjoyed by the wealthiest of them.
Startups in the tech hub raised less than $10 billion in the fourth quarter, the lowest since 2017, according to CB Insights. Only 465 deals were closed during that period, the fewest in five years. Ironically, SVB’s collapse had little direct bearing on the funding slowdown. Instead, VCs and founders get a lesson in interest rate and duration risk.
After taking in more than $120 billion in deposits — much of it likely transferred directly from VC accounts at SVB to startup accounts at the same bank — the Santa Clara institution had the unfortunate problem of holding too much cash. So he bought long-term debt issued by the agency. When the US Federal Reserve raised rates, the value of these bonds fell. But the deposits in his bank – a debt – remained the same. It faced a $15 billion hit to its balance sheet — not because VC and startup deals dropped, but because the bank mismanaged duration risk.
Despite a guarantee from the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. that all deposits are safe—beyond the $250,000 per account insurance from the FDIC—SVB’s collapse could have a massive impact on how the startup ecosystem operates.
Silicon Valley Bank has become the financier of tech stars, offering a range of products tailored to their needs that few other institutions have dared. Founders and investors loved it, and it counted half of all venture capital-backed companies as clients.
“As an innovator, you likely own private or illiquid assets and may have financial needs for atypical acquisitions and terms that work with cash flow,” SVB Private says on its website.
Among the items offered by SVB Private: Private jet financing, a business he was particularly proud of, touting the hiring of a new aviation finance specialist just a year ago. Also on the menu: money to fund stakes in private or public companies and even back investments in venture capital or private equity funds.
Each of these are standard offerings and help fill out the income statements of even the biggest banks. But financial institutions tend to offer wealth management services to clients who actually own wealth. SVB had no such qualms, and customers were fiercely loyal as a result – even when a bank put their deposits at risk.
Beyond looking after executives and making sure they were flying comfortably, SVB was an important staple on startup balance sheets. While venture capital-backed equity is the most famous source of funding, SVB pioneered the venture debt industry, providing loans to early-stage companies. Founders like the idea of getting cash to build their business without giving up equity, so this has been a successful product.
They also enjoyed SVB’s no-nonsense approach to providing the basic financial services every young business needs, such as payments and invoicing, products that might take weeks to set up at a bank. on Wall Street.
As the FDIC calms depositor nerves and unravels the mess left by a tumultuous week, dozens of other banks and financiers will scoop up thousands of customers and billions of dollars in business. But Silicon Valley will be left wondering if their new bank really has their backs.