Silicon Valley Bank, founded in 1983 and was the 16th largest bank in US, collapsed on Friday after failing to raise capital. This is the largest bank failure since the 2008 financial crisis. Silicon Valley Bank (SVB) was the bank of choice for venture capital and startups, and was where startups would park their money after a successful fundraising event. In the span of 30 hours, SVB went from the trusted bank for startups with 8 500 employees to being sold for scraps.
The failure of the SVB and its close relationship with a specific industry is a cause for concern. Whether you are in risk, security, engineering, or C-Suite, you should consider the impact this may have on your direct 3rd parties such as SaaS and Fintech products as well as the 3rd parties that those 3rd parties are using.
What Happened
In 2019, SVB had $61 billion in deposits which grew to $189 billion in 2022 as many tech startups were raising money during the pandemic tech boom. With the increase in deposits, SVB bought $100 billion worth of Mortgage Backed Securities (MBS) with an average yield of 1.5% while the interest rate was 0%. As the Federal Reserve increased interest rates to get inflation under control, the interest cost to SVB increased drastically. This affected both the interest SVB must pay on its liabilities as well as the interest owed to depositors. At the end of 2021, SVB’s interest expense was $62 million and by the end of 2022, it was $862 million.
On Wednesday, SVB announced a plan to raise capital and increase its liquidity by a share offering and by selling its available-for-sale securities. At the time SVB did not have a liquidity issue but wanted to shore up its available capital and balance sheet. This action did not go to plan and spooked investors who started selling their shared in SVB.
On Thursday, because of the plan, top venture capital firms including Coatue, Founders Fund, Sequoia Capital and Union Square Ventures along with top advisers like Peter Thiel advised their portfolio companies to completely withdraw or to keep minimal funds in cash accounts at SVB.
On Friday, there was a bank run by startups and VCs as they moved their money to other banks. This $42 billion bank run lead to wire payments getting delayed by over 2 hours and many wire payments were not honored by the bank. As a result, the bank had a negative cash balance of $958 million and was shut down by California Regulators and its assets have been seized by the Federal Deposit Insurance Corporation (FDIC).
The Impact
The FDIC insures the first $250 000 of a bank account (Per individual, per account type and per institution). Since most SVB clients were startups that had large balances, only 2.7% of the deposits were insured while 97.3% was not insured.
The fact that most of the deposits were not insured will be a massive blow to startups and will likely cause many of them to go out of business unless the regulator and or federal government intervenes. The focus of the bank on a specific sector can b
So far, the following companies have revealed exposure to Silicon Valley Bank:
- Circle: $3.3 billion – $3.3 Billion of the $40 billion USDC reserves.
- Roku: $487 million – 26% of its $1.9 billion cash reserve
- BlockFi: $227 million
- Roblox: $150 Million – 5% of its $3 billion of cash and securities
- Ginkgo Bio: $74 Million
- iRhythm: $55 Million
- Rocket Lab: $38 Million
- Sangamo Therapeutics: $34 Million
- Lending Club: $21 Million
- Payoneer: $20 Million
The Risk
The risk from the Silicon Valley Bank collapse is two-fold, firstly many startups have their seed money in SVB and will not be able to continue business without it, secondly SVB’s tech focus allowed startups to build payment rails on top of their systems. Without these systems being available, the cascading failure of 3rd parties such as SaaS platforms is significant. An example of such a failure is payroll companies Rippling and Patriot, which have not been able to process payroll for their customers. Over 300 applications on Quickbooks are reportedly affected by the collapse as well.
The inability for startups to process payrolls and other expenses will create situation where 3rd parties such as SaaS platforms, even those that are well established, can suffer significant loses as a result of this collapse as their customers are unable to pay their bills. If market contagion takes hold, there may be bank runs at smaller banks which would have an adverse effect on many fintech companies including Acorns, M1 Finance and Wealthfront. If you are working in risk, security and / or in a C-Suite position, it would be wise to take stock of the platforms you are using and to find any risk exposure you may have to this situation and to take action if needed.
