Silicon Valley Bank collapse sends tech startups scrambling

Silicon Valley Bank collapse sends tech startups scrambling



CNN
 — 

The sudden collapse of a top Silicon Valley lender has pushed tech investors and startups to scramble to figure out their financial exposure and the impact on their ability to operate, at a time when many businesses were already on edge from widespread layoffs and less access to capital in an uncertain economy.

California regulators closed down Silicon Valley Bank on Friday and put it under control of the US Federal Deposit Insurance Corporation. The FDIC is acting as a receiver, which typically means it will liquidate the bank’s assets to pay back its customers, including depositors and creditors.

The move capped off a stunning 48 hours during which uncertainty about the prominent tech lender’s liquidity prompted some startups to weigh withdrawing funds and also sparked fears of a contagion risk for the broader financial industry.

Following the bank’s collapse on Friday, uncertainty in the startup community only grew, with founders worrying about getting their money out, making payroll and covering operating expenses.

“Now that the bank has folded, I just want to know what happens next,” Ashley Tyrner, founder of health food delivery company FarmboxRx, told CNN in an e-mail. “The FDIC covers 250K, but am I going to recover my whole 8 figures?”

Parker Conrad, the CEO and co-founder of HR platform Rippling, said Friday that his company has learned that some customers’ payrolls are being delayed due to the bank’s “solvency challenges.”

“Our top priority is to get our customers’ employees paid as soon as we possibly can, and we’re working diligently toward that on all available channels, and trying to learn what the FDIC takeover means for today’s payments,” he wrote on Twitter.

Arjun Sethi, an investor at Tribe, tweeted Friday that “right now VCs are writing emails to disclose SVB exposure.” Meanwhile, Sam Altman, the CEO of OpenAi and former president of startup accelerator Y Combinator, said investors should consider offering “emergency cash to your startups that need it for payroll or whatever.”

He added: “no docs, no terms, just send money.”

At least one company attempted to get money quick, by offering a last-minute sale.

Ben Kaufman, co-founder of the venture-backed toy store and online retailer Camp, said in an email to customers that “most of our company’s cash assets” were held “at a bank which just collapsed.” In the same email, Kaufman announced a 40% off deal on all online merchandise for customers using the code: “BANKRUN.”

“Or you can pay full price without the code– which is also appreciated,” he wrote. Kaufman said all sales from this point forward “allow us to generate the cash needed to continue operations so we can continue to deliver unforgettable family memories.”

“Mass hysteria”

Even before the collapse, a number of startups were said to have weighed pulling their money from the bank, according to media reports and public posts from venture capitalists.

Founders Fund, an influential venture capital firm founded by billionaire Peter Thiel, reportedly advised its portfolio companies to pull money from the bank. (A Founders Fund rep declined CNN’s request for comment). Tribe Capital, meanwhile, urged companies to be mindful of where they keep their money and how they fundraise.

“Any bank with a business model is dead if everyone moves,” Sethi wrote in a memo to founders, which he shared on Twitter. “Since risk is nonzero and the cost, it’s better to diversify your risk, if not all.”

Sethi urged founders to “hold your assets in the most liquid traditional banks, and do not take unnecessary risks.” He also recommended founders “call every debt line, close all primary rounds, do it now, and be willing to make concessions.”

But by time Tyrner’s company tried to pull funds, it was too late, she said.

“The entire SVB system was down,” she told CNN. “We couldn’t log in to our accounts, couldn’t contact anyone, their helpline rang to a “disconnected” message or just hung up… none of our account reps would respond to calls or emails.”

Other prominent venture capitalists had called for calm in an apparent bid to avoid fueling panic. Mark Suster, a partner at venture capital firm Upfront Ventures, urged those in the VC community to “speak out publicly to quell the panic” around Silicon Valley Bank, saying in a lengthy Twitter thread that “classic ‘runs on the bank’ hurt our entire system.”

While urging people to stay calm, however, he added, “I know some have already withdrawn money. I know some are advising this. I know it’s scary…What matters is that we don’t have or create mass hysteria.”

Villi Iltchev, a partner at Two Sigma Ventures, similarly said his peers should “support” the bank. “SVB is the most important capital provider to tech startups and the biggest supporter of the community,” he said in a tweet. “Now is the time to support them.”

Adding to challenges in startup market

The rapidly unfolding fallout at Silicon Valley Bank comes at a challenging moment for the tech industry. Rising interest rates have eroded the easy access to capital that helped fuel soaring startup valuations and funded ambitious, money-losing projects. Venture funding in the United States fell 37% in 2022 compared to the year prior, according to data released in January by CBInsights.

At the same time, broader macroeconomic uncertainty and recession fears have prompted some advertisers and consumers to tighten spending, cutting into the industry’s revenue drivers. As a result, the once high-flying tech world has fallen into a steep cost-cutting season marked by mass layoffs and a renewed focus on “efficiency.”

The situation at Silicon Valley Bank may have been worsened by more startups feeling pinched for cash and needing to withdraw funds. Now, the bank’s collapse risks compounding the industry’s cash crunch and broader turbulence.

In his post suggesting a bailout may be needed, Ackman said a Silicon Valley Bank “failure” could “destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash.”

Ackman compared SVB’s situation to Bear Stearns, the first bank to collapse at the start of the 2007-2008 global financial crisis. But this time, the trouble is brewing in Silicon Valley’s backyard.

– CNN’s Allison Morrow contributed to this report.

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