SANTA CLARA, California — Thousands of start-up founders and their employees faced a weekend of panic, as Silicon Valley Bank was abruptly shuttered by regulators March 10 after depositors and investors tried to pull out $42 billion, the second biggest run on a bank in U.S. history.
Silicon Valley Bank, headquartered in Santa Clara, provided services to some of the best-known names in technology. More than 10,000 customers lost immediate access to their cash as the California Department of Financial Protection and Innovation closed the bank and appointed the Federal Deposit Insurance Corporation as a receiver.
Depositors with accounts valued at under $250,000 were insured by the FDIC. However, more than 90 percent of Silicon Valley Bank customers had accounts valued at over $250,000, which meant that everything over that amount was not insured.
Late March 12 afternoon, Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg jointly released a statement, noting that depositors at Silicon Valley Bank would have access to all their funds the following morning.
“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law. No losses will be borne by the taxpayer,” said the regulators in a statement. The same move was made for Signature Bank of New York, which was also shut down March 10.
Investors in SVB are not protected by the Feds announcement. They will receive nothing.
“This is an interim measure to take care of fears that are emerging when the Asian markets open in a couple of hours,” venture capitalist MR Rangaswami, managing director of the Sandhill Group, told New India Abroad immediately after the announcement was made. “They want to avoid a crash in Asia that would follow in the U.S. tomorrow morning.”
“There would have been a huge market correction if there was not an announcement by 6:30 a.m. Eastern Time Monday morning,” said Rangaswami. In conversations over the weekend with politicians, the venture capitalist said he was confident that individuals at a high level within government understood the gravity of the situation.
Federal regulators have been working all weekend with larger banks who might acquire Silicon Valley Bank. Bids were due March 12 by 2:30 p.m. Rangaswami predicted the buyer could be JP Morgan Chase or Citi. “This is a prized asset: the buyer will make a fortune.”
SVB served the cutting edge of start-ups in several sectors, including climate tech, national security, artificial intelligence and other endeavors.
“It was definitely a very sad day for Silicon Valley bank and its constituents,” venture capitalist Vish Mishra, general partner at Clearstone Venture Partners, told New India Abroad in an interview before regulators announced the 11th hour save. “This is an iconic bank which has propelled the innovation economy.”
“Moody’s was going to downgrade the bank’s credit rating, and people started to panic by pulling out their deposits. But it was a Draconian measure for California regulators to abruptly lower the boom. They should have given them a 30-day grace period. Their balance sheet is so strong,” he said.
The closure of the bank would have definite ramifications for India, especially if layoffs had ensued, said Mishra, adding also that a large percentage of venture capital in India stems from the U.S.
Rangaswami said he had been speaking with Indian politicians who were concerned about the bank’s closure.
Shernaz Daver, who has worked with startups and venture in the Silicon Valley for many years and now serves as the operating partner and CMO at Khosla Ventures, told New India Abroad that on March 11, Khosla Ventures went to 100 companies in its portfolio and offered to provide personal loans so that companies could make payroll. She quoted founder Vinod Khosla: “VCs need to be value adds now and not blame founders. Most large funds can and should help.”
“I firmly believe that this is the time when venture capitalists need to step up. We must be there for the bad times as well,” said Daver, noting that several venture capitalists have balked at the notion of temporarily shoring up the companies in their portfolios.
“Every tech company had a connection to SVB. It was founder friendly and shared the ethos of what the Silicon Valley is all about,” she said.
Daver noted the role of social media in the debacle. As the bank announced its intent to sell shares, and then itself, venture capitalists — including Peter Thiel — advised companies to pull out their balances from the floundering bank. Daver said it has made her concerned about the potential vulnerability of other banks, going forward.
In interviews with start-ups before the March 12 announcement, founders told New India Abroad they were worried about making payroll, and, longer term, the ability to retain employees and attract investor interest.
Irfan Khan, founder of Cloud Sufi, a data monetization company with over 300 employees told New India Abroad: “We are a profitable company, built on a very solid foundation, but this will set us back a few years. Our acquisitions strategy will have to change.”
As he heard the news of SVB’s collapse, Khan decided to take a “wait and watch” approach. “I was expecting the government to step in and stabilize the situation.”
“There were so many companies who did not know what they would do Monday morning,” he said, noting that companies with products on the market would have been hit especially hard. “How do you build without revenue?”
“Everyone is shaking their heads right now. Which banks can we trust? And what do we trust going forward? Gold bars? It is time for government to step in and show business that these errors can and will be corrected immediately,” said Khan.
A life sciences entrepreneur, who spoke on conditions of anonymity so as not to spook employees, told New India Abroad he found out about the possible run on SVB by a venture capitalist. “We tried to remove our money from the bank, but by Thursday, wire transfers were no longer going through.”
The founder said he did not join the long lines outside SVB’s branch offices.
“We are a smaller company, so I don’t have a lot off expenses right now. But we will need to raise more money in 6-12 months. Will this put a damper on everything?”
“Silicon Valley Bank was well trusted by investors,” he said, adding: “They treated start-up founders very well. Other banks don’t even know what a start-up is. So, long-term, will the venture capital ecosystem get jammed up?”