- Silicon Valley Bank was shut down by regulators on Friday.
- The bank has long been a key piece of the tech community.
- Venture capital firms were quick to turn their back on the bank that has served them for decades.
Silicon Valley Bank was shut down by regulators on Friday morning, a stunning end to a bank considered a key player for the tech industry for decades. People are already looking to point fingers.
Interest rates are one culprit. The bank had taken a large position in US Treasuries at the height of the tech boom as it looked for a safe space to stash cash. That turned out to be a bad bet.
The overall downturn of the tech market didn’t help either. Specializing in a sector as a bank has its benefits — nearly half of all US startups banked with SVB — but it also comes with risks: Your clients’ pain quickly becomes yours.
One group that seems to have skirted the blame so far: venture capitalists.
But it was VCs, reacting to SVB’s announcement of a need to raise funds, who helped set off a run on the bank that ultimately proved fatal.
SVB served as key ally for the tech community for four decades, which included weathering the dot-com bubble and the 2008 financial crisis. And yet VCs were happy to pull the plug on the bank at the first sign of trouble, encouraging founders to take their money and run.
Now, their hastiness has put the entire industry in crisis, as startups wonder how they’ll even make payroll, and questions remain about where the industry will go for its future finance needs.
‘I also don’t want to be the last one holding the bag.’
To be clear, I’m not trying to let SVB off the hook. The bank made some extremely poor financial decisions that got it into this situation in the first place.
To make matters worse, it didn’t communicate those choices well. Lulu Cheng Meservey, an executive vice president and the corporate affairs and chief communications officer at Activision Blizzard, has a fantastic thread on the multiple ways in which SVB dropped the ball when it announced it was raising more money.
But even still, the bank did include a deck (something VCs should be well versed in reading) laying out why, despite needing some help, it still had solid fundamentals
None of that, however, seemed to matter. By Thursday afternoon Bloomberg was reporting some of the most high-profile VCs, including Peter Thiel’s Founders Fund, Coatue Management, and Union Square Ventures, all were telling their founders to move their money out of SVB.
It wasn’t long before the rest of the industry followed. Some tried to caution the industry against overreacting, but it was too little, too late.
As one VC put it to Insider’s Ben Bergman, “I don’t think Silicon Valley Bank is going under, but I also don’t want to be the last one holding the bag.”
A self-fulling prophecy
It was seemingly over before it even begun, as regulators stepped in to close down the bank less than 48 hours after it announced its plan for a capital raise.
The most maddening thing about the SVB saga is that the VCs who raised the alarm early will tout their decision as a win. SVB did in fact fail. If you had moved fast enough, you got your money out in time.
But that logic is faulty. Bank runs only happen because the people involved in them make them happen. SVB failed because you helped make it fail.
A note early Friday from Morgan Stanley stated the bank believed SVB had “more than enough liquidity to fund deposit outflows related to venture capital client cash burn,” pegging the firm’s available liquidity at roughly $180 billion, compared with on-balance-sheet deposits at $165 billion.
Maybe in the coming days and weeks some serious accounting malfeasance will be uncovered at SVB that will indicate the bank was on borrowed time. That it was only a matter of time before things collapsed. A press release from the California Financial Department of Financial Protection and Innovation on Friday did state it took possession of SVB due to “inadequate liquidity and insolvency,” but didn’t cite more details.
What seems more likely, though, is that a bad situation was made exponentially worse by a group of people who pitch themselves as unique thinkers but instead chose to act in the same, frantic way.
Now, the consequences have extended beyond just SVB, as startups that used the bank worry whether they’ll even make payroll next week.
But what’s worse are the potential long-term affects to the space. A bank that catered to tech startups’ specific wants and needs is now gone. Whether those firms will ever be able to get that type of service remains to be seen.