Michael Liedtke
AP – Silicon Valley Bank’s (SVB) collapse rattled the technology industry that had been the bank’s backbone, leaving shell-shocked entrepreneurs thankful for the government reprieve that saved their money while they mourned the loss of a place that served as a chummy club of innovation.
“They were the gold standard, it almost seemed weird if you were in tech and didn’t have a Silicon Valley Bank account,” CEO of Seattle startup Shelf Engine Stefan Kalb, said during an interview as he started the process of transferring millions of dollars to other banks.
The Biden administration’s move guaranteeing all Silicon Valley Bank’s deposits above the insured limit of USD250,000 per account resulted in a “palpable sigh of relief” in Israel, where its booming tech sector is “connected with an umbilical cord to Silicon Valley”, said founder of the Israeli venture capital crowdfunding platform OurCrowd Jon Medved,
But the gratitude for the deposit guarantees that will allow thousands of tech startups to continue to pay their workers and other bills was mixed with moments of reflection among entrepreneurs and venture capital partners rattled by Silicon Valley Bank’s downfall.
The crisis “has forced every company to reassess their banking arrangements and the companies that they work with”, said CEO of London-based startup Learnerbly Rajeeb Dey.
Entrepreneurs who had deposited all their startups’ money in Silicon Valley Bank are now realising it makes more sense to spread their funds across several institutions, with the biggest banks considered safer harbours.
Kalb started off his Monday by opening an account at the largest bank in the United States, JP Morgan Chase, which has about USD2.4 trillion in deposits. That’s 13 times more than the deposits at Silicon Valley Bank, the 16th largest in the US.
Bank of America is getting some of the money that Electric Era had deposited at Silicon Valley Bank, and the Seattle startup’s CEO, Quincy Lee, expects having no difficulty finding other candidates to keep the rest of his company’s money as part of its diversification plan. “Any bank is happy to take a startup’s money,” Lee said.
Even so, there are fears it will be more difficult to finance the inherently risky ideas underlying tech startups that became a specialty of Silicon Valley Bank since its founding over a card game in 1983, just as the advent of the personal computer and faster microprocessors unleashed more innovation.
Silicon Valley quickly established itself as the “go-to” spot for venture capitalists looking for financial partners more open to unconventional business proposals than its bigger, more established peers who still didn’t have a good grasp of technology.
“They understood startups, they understood venture capital,” said Sublime Systems CEO and co-founder Leah Ellis, whose company in Somerville, Massachusetts is commercialising a process to make low-carbon cement. “They were woven into the fabric of the startup community that I’m part of, so banking with SVB was a no brainer.”
Venture capitalists set up their accounts at Silicon Valley Bank just as the tech industry started its boom and then advised the entrepreneurs that they funded to do the same.
That cosy relationship came to an end when the bank disclosed a USD1.8 billion loss on low-yielding bonds that were purchased before interest rates began to spike last year, raising alarms among its financially savvy customer base who used the fruits of technology to spread warnings that turned into a calamitous run on deposits.
Founder and managing director of venture funder AllegisCyber Capital Bob Ackerman likened last week’s flood of withdrawal demands from Silicon Valley Bank to a self-inflicted wound by “a circular firing squad” intent on “shooting your best friend”.
Many of Silicon Valley Bank’s roughly 8,500 employees now find themselves hanging in limbo, too, even though government regulators now overseeing the operations have told them they will be offered jobs at 1.5 times their salaries for 45 days, said Rob McMillan, who had worked there for 32 years.
“We don’t know who’s going to pay us when,” McMillan said. “I think we all missed a pay cheque. We don’t know if we have benefits.”
Even though all of Silicon Valley Bank’s depositors are being made whole, its demise is expected to leave a void in the technology sector that may be difficult to fill.
In an essay that he posted on his LinkedIn page, prominent venture capitalist Michael Moritz compared Silicon Valley Bank to a “cherished local market where people behind the counters know the names of their customers, have a ready smile but still charge the going price when they sell a cut of meat”.
Silicon Valley Bank is fading away at a time when startups were already having a tougher go at raising money, with a downturn in technology stock values and a steady rise in interest rates causing venture capitalists to retrench.
The bank often helped fill the financial gaps with one of its specialties – loans known as “venture debt” because it was woven into the funding provided by its venture capitalist customers.
“There’s going to be a lot of great ideas, a lot of great teams that don’t get funding because the barriers to entry are too high or because there are not enough people who are willing to invest,” said an investor in the cybersecurity startup Symmetry Systems and a venture partner at ForgePoint William Lin, a venture capital firm.
With Silicon Valley Bank gone and venture capitalists pulling in their reins, Lin expects there will be fewer startups getting money to pursue ideas in the same fields of technology. If that happens, he foresees a winnowing of competition that will eventually make the biggest tech companies even stronger than they already are.
“There’s a real day of reckoning coming in the startup world,” predicted CEO of the cybersecurity firm Tenable Amit Yoran.
That may be true, but entrepreneurs like Lee and Kalb already feel like they had been through an emotional wringer after spending the weekend worrying that all their hard work would go down a drain if they couldn’t get their money out of SVB.
“It was like being stuck inside a doomsday loop,” Lee said. Even as he focusses on growing Shelf Engine’s business of helping grocers managing their food orders, he vowed not to forget a very hard lesson.“ I obviously now know banks aren’t as safe as I used to think they were,” he said.
