product-hunt-logo
Support our bid to win the #1 Product of the Month honors on Product Hunt!
9 min read
What Founders Can Learn from the Silicon Valley Bank Ordeal
What Founders Can Learn from the Silicon Valley Bank Ordeal
Kelly O'Connor
Kelly O'Connor Peaka / Sophisticated Nomad

What Founders Can Learn from the Silicon Valley Bank Ordeal

We spent 2022 with the ghost of a recession looming over our heads. Higher interest rates and rising energy prices were pointing to an economic slowdown by the year's end at the latest, and the layoffs in the tech industry seemed to confirm the worst fears. However, no one expected a bank run, and not in California, of all places. Yes, we got a bank run, people. The fact that it involved a bank that allegedly served "nearly half of all U.S. venture-backed startups" makes it a case worthy of a deep dive.

What happened?

Silicon Valley Bank (SVB), the bank of choice for many well-known tech startups, collapsed and was seized by the California Department of Financial Protection and Innovation on March 10, 2023. SVB had $209 billion in assets and was the 17th largest bank in the U.S. at the time of its collapse. Luckily, SVB was much smaller than banks like Goldman Sachs and Lehman Brothers, which were involved in the subprime mortgage crisis of 2007-2008. But SVB's central role in the tech industry still caused concern among government officials as a liquidity problem could spread through the startup ecosystem like wildfire and render startups insolvent in a short time.

Two other relatively smaller banks shared the same fate with SVB: Signature Bank, which had assets worth $110 billion and was the 32nd largest bank in the U.S., and Silvergate Bank, the 153rd largest bank in the U.S., with $11.4 billion in assets. Both of these banks were prominent lenders to crypto companies.

Why did it happen?

SVB failed because it got stuck between its short-term liabilities and long-term investments. It had invested heavily in U.S. Treasury bonds to secure high gains. With the Fed raising interest rates to fight inflation, the value of those bonds dropped, shrinking SVB's asset base. Apparently, SVB was late to secure liquidity in an environment where the cost of borrowing was surging. So, it had to sell its Treasury bonds for a significant loss to meet liquidity demands from its depositors, which set off alarm bells in the industry.

SVB's liquidity problems were no secret among investment circles. What complicated the situation was the fact that depositors had become more reliant on their savings while SVB struggled to create liquidity. Startups were struggling to find funding on favorable terms throughout 2022 and were forced to withdraw more money to sustain their operations. Individuals, too, increased their drawdowns as a result of the tech layoffs in California. SVB found itself drifting into a perfect storm.

The bank announced on March 8 an emergency sale of its common and preferred stock to raise $2.25 billion. Coming at the heels of the sale of Treasury bonds before, this served as the last straw and triggered a bank run. The bank's stock plunged by 60 percent on March 9. People rushed to withdraw deposits, moving out $42 billion in a single day, leaving the bank with a negative cash balance of $958 million.

To bail out, or not to bail out, that's the question

Federal Deposit Insurance Corporation (FDIC) insures deposits in U.S. banks up to $250,000 per depositor, per insured bank. Any amount above that figure has no state guarantee and can only be covered by other means like insurance bought from private firms.

Reuters reported that SVB had $175 billion in deposits, 89 percent of which was above the threshold and thus without insurance. The clients received access to the insured portion of their deposits on March 13. But the question of uninsured deposits was more difficult to deal with. The Biden administration found itself between a rock and a hard place: Make every client whole, and the government would be accused of performing another bailout on taxpayers' money. Leave to their own devices the depositors with uninsured deposits, and it could cripple the tech industry, setting off a domino effect. Authorities were under pressure from two camps defending two opposing views.

Old sins have long shadows

Y Combinator led the effort urging authorities to make all depositors whole at SVB. Garry Tan, the CEO and President of YC, wrote a petition addressing the U.S. Treasury Secretary Janet Yellen and was joined by 650 CEOs. The petition asked for a backstop, that is, credit support or cash injection, not a bailout. Still, the move created a significant backlash on social media, as it revealed that CEOs of multi-million dollar companies were not particularly good at managing risk, despite knowing full well how the banking industry operated.

The backlash was understandable in light of SVB CEO Greg Becker's past efforts to reduce federal oversight over SVB. The law (The Dodd-Frank Act) called for increased regulations for financial institutions controlling assets of more than $50 billion. Becker lobbied against this law, campaigning for the threshold to be raised to $250 billion because SVB had such a "deep understanding of the markets it serves" that there was no need for extra regulations to kick in.

Becker got his wish on May 24, 2018, when Donald Trump finally signed the bill that raised to $250 billion the threshold for more stringent banking regulations to be applied and exempted banks like SVB from more thorough stress tests. Becker sold $3.6 million worth of SVB stock on February 27, two weeks before the bank run, and flew with his wife off to Hawaii, where he has a condo.

FDIC announced on March 13 that it would guarantee uninsured deposits as well, raising doubts about another bank bailout. However, the Biden administration denied these allegations, citing that it was not rescuing the bank management or the shareholders. Instead, the Fed chose to intervene by creating the Bank Term Funding Program (BTFP), which would offer loans of up to one year in length to troubled financial institutions. The fact that the BTFD is funded through the Deposit Insurance Fund, which itself is sponsored by the finance industry, seems to have put an end to the bailout allegations.

Key takeaways for founders

Venture capital firm NFX conducted a survey among 870 founders immediately after the collapse of SVB. The survey results shed light on the problems of the startup ecosystem right before the SVB collapse, and the steps founders took to rectify mistakes in risk management right after it:

  • Most startups had a single bank account before SVB went under. The percentage of startups having just one bank account halved in a few days, going from 58 to 28.5 during the crisis. The fact that more than half of the founders were comfortable keeping in a single account the millions of dollars they raised in fundraising rounds attests to the illusion of immunity they were in. Spreading out the funds to different banks would give them an insurance of a quarter of a million dollars per bank, which is no small sum for a startup. Neglecting this point speaks to their lax management practices.

  • The almost simultaneous collapse of SVB, Signature Bank, and Silvergate Bank raised doubts about the resilience of regional banks in case of a bank run. More than a quarter of founders responded to this by choosing to open an account with a big bank, raising the percentage from 31 before the SVB collapse to 57 after. Bank of America, Wells Fargo, and Citigroup did particularly well, enjoying a surge in deposits recently.

  • 54 percent of founders communicated with their investors for guidance and financial advice as the SVB-gate unfolded. This figure is all the more striking when you take into account that 75 percent of founders talk to their investors only once a month or even less frequently. While Hoxton Ventures advised its portfolio companies to withdraw two months' worth of burn from SVB, Peter Thiel's Founders Fund urged the startups on its portfolio to move their deposits to another bank.

This short episode once again demonstrated that being in frequent contact with well-connected investors can pay off for founders at critical moments. Investors tend to be steeped in the ups and downs of the business world and possess a strategic perspective that many founders lack. Tapping into their wisdom and insights to manage risk and review existing practices is the least founders can do. However, founders would be well-advised to prepare for a period where investors will get to enjoy more bargaining power at the negotiating table.

Final thoughts

Despite all the funding rounds closed, the impressive year-on-year growth rate, and the incredible boost it received during the pandemic, the startup ecosystem in the tech industry remains fragile. The news of SVB going under in just 48 hours showed that most startups are only a single bad decision away from being unable to pay wages unless the government intervenes. Tech startups dodged a bullet in March 2023. Here is hoping that they will at least have the prudence to keep their money in more than one bank in the future.

Your biweekly inspiration delivered to your inbox

Join our newsletter for news, tips, and blog posts on anything data integration!

warning-icon Please fill out this field
check-icon Thank you! You have been subscribed.
Similar posts you might be interested in
How to Create an Ideal Customer Profile for SaaS Businesses
Fundraising Startups March 19, 2023
How to Create an Ideal Customer Profile for SaaS Businesses

How do you create an ideal customer profile (ICP)? Why should a SaaS company create one? How does Peaka help you hone your ICP? Find out in this blog post.

avatar
Bruce McFadden Peaka / Seasoned Taskmaster
How to Create an Account-Based SaaS Marketing Strategy
Fundraising Startups March 19, 2023
How to Create an Account-Based SaaS Marketing Strategy

Here is everything a SaaS founder needs to know about account-based marketing, how it works, its benefits, and how Peaka can help ABM teams implement it.

avatar
Eugene van Ost Peaka / IT Soothsayer
Top 6 SaaS Revenue Metrics to Track in 2024
Fundraising Startups March 19, 2023
Top 6 SaaS Revenue Metrics to Track in 2024

A deep dive into SaaS revenue metrics, four data integration tools to track SaaS revenue, and benefits of blending your revenue data with your CRM data.

avatar
M. Çınar Büyükakça Peaka / Prolific Polemicist
peaka-logo-small
Begin your journey today

Start your 14-day free trial to explore Peaka!

success-mail-img

You've joined our email list. Our newsletter will be delivered to your inbox every other week, with news from Peaka and the no-code world, as well as updates on the latest trends and developments in the data integration space!

success-mail-img

Thank you for your interest. We’ll contact you soon.

publish-icon
Let’s work together!

To better understand your requirements and how we can assist you, please fill out the contact form below. Our dedicated team of experts is ready to listen and address your specific needs.