SVB failure has VCs wrestling with what’s next

The Federal Reserve issued a statement Sunday, March 12, saying that all Silicon Valley Bank depositors “will have access to all of their money starting Monday, March 13.”

Update: Averting a potential catastrophe for some VC-backed companies, the Federal Reserve issued a statement Sunday, March 12, saying that all Silicon Valley Bank depositors “will have access to all of their money starting Monday, March 13.” Thousands of venture-backed companies are SVB customers, and they worried that the bank’s sudden failure would mean they wouldn’t be able to pay employees or vendors in the near term because their deposits were far exceeded the FDIC-insured amount of $250,000.

The failure of Silicon Valley Bank, a longtime favorite of the tech industry, has venture capitalists scrambling to help portfolio companies that are depositors with the bank and make sure their own firms’ deposits are safe. One VC described the bank’s collapse as an “extinction level event” for technology start-ups.

It appears that at least some firms were able to avoid trouble. CNBC reported that Coatue Management, Founders Fund, Pear Ventures and Union Square Ventures were among those that advised portfolio companies to move funds out of SVB a day before regulators took control of the bank.

A placement agent with dozens of venture capital clients told Venture Capital Journal that SVB’s failure will have a big impact on both venture firms and their portfolio companies. “Some VC general partners personally may be in the same boat,” said the source, who asked not to be named. “Since the FDIC has to liquidate assets in order to pay those out, it could cause a temporary liquidity crunch for those firms in those situations.”

The California Department of Financial Protection and Innovation closed the Santa Clara-based bank Friday morning and appointed the Federal Deposit Insurance Corporation as receiver. The move came after SVB experienced a run on deposits and was unable to secure new funding.

“All insured depositors [up to $250,000] will have full access to their insured deposits no later than Monday morning, March 13, 2023,” the FDIC said in a statement. “The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”

It isn’t clear how much of the bank’s $175.4 billion in total deposits came from venture firms and start-ups. SVB’s website said it serves “20,000 investors and founders.”

David Sacks, founder and partner of Craft Ventures, called on federal officials to calm concerns of corporate customers. He wrote on Twitter: “Where is Powell? Where is Yellen? Stop this crisis NOW. Announce that all depositors will be safe. Place SVB with a Top 4 bank. Do this before Monday open or there will be contagion and the crisis will spread.” (Sacks noted that “Craft has no money at SVB.”)

Best advice

What should VCs and their portfolio companies do now? For starters, customers with accounts in excess of $250,000 have been advised to call the FDIC at 1-866-799-0959.

On Friday afternoon, nearly 900 people tuned into an hour-long webinar put on by law firm Foley & Lardner called, “Silicon Valley Bank: What You Need to Know.”

The attorneys advised SVB customers to immediately do a cash-flow analysis to figure out exactly who they need to pay in the near term and how much cash they have available. They also counseled them to consider drastic steps such as furloughing employees or seeking bankruptcy protection, which could buy them time while regulators work through SVB’s problems.

Garry Tan, president and CEO of Y Combinator, one of the most prolific investors in technology start-ups, wrote on Twitter that SVB’s failure could be catastrophic for small tech companies. “The #1 pressing issue for these startups is *payroll* — you can’t have people work if you can’t pay them,” Tan tweeted. “This means mass furlough[s]. It might mean thousands of startups die before the FDIC gets through its receivership process and releases the funds.”

Foley attorneys said that before taking any steps, SVB corporate customers should be sure they aren’t risking legal exposure by violating federal or state laws regarding layoffs and plant closures. And if the customers are public companies, they should make sure they are in compliance with regulations that require them to disclose if they have significant deposits with SVB, the attorneys noted.

It is unclear how long it will take before customers know when they will be able to access part or all of their deposits, said Holly O’Neil, a Foley attorney who specializes in financial restructurings and reorganizations. “Ideally, by Monday [regulators] will transfer the assets to a buyer,” she said. “If not, this could go on for an extraordinarily long time. It could go on for years.”

Those looking for alternatives to SVB have plenty to choose from. Raymond James has “been working around the clock to assist founders, VCs and PEs,” many of whom are drawn to the institution’s assurance that customer deposits are insured up to $50 million, said Danyell Munassi, associate vice president of wealth management at Raymond James.

“Ideally, by Monday [regulators] will transfer the assets to a buyer. If not, this could go on for an extraordinarily long time. It could go on for years.”

“Today has been one of devastation throughout the startup/innovation ecosystem — from founders who had all of their operating capital frozen and are now struggling to determine how they will make payroll to VC and PE firms who faced similar challenges,” Munassi said. “The impact of seeing the 17th largest financial institution fail is a sobering wake up call for the tech sector.”

Brex, a VC-backed fintech company, quickly made a play for SVB customers when news spread that the bank was in trouble. The day before regulators shut down SVB, Brex “received billions of dollars in deposits from Silicon Valley Bank customers,” CNBC reported.

Following the bank closure, Brex announced that it is “now offering an emergency bridge credit line for SVB customers migrating to a Brex Business Account. … This credit line is funded by third-party capital (and not Brex directly), who are working with Brex to minimize the impact of this event to the startup ecosystem.”

Shai Goldman, head of Brex’s XIR program, which serves the early-stage start-up community, said on Twitter that SVB’s failure would impact VC firms as much as their start-ups: “If you have a $1B fund, you probably have a $100M-$200M capital call line w/ SVB [and] deposits at SVB. Both are frozen. GP doesn’t want to call capital from LPs this second. So that deal isn’t happening. Startups are impacted even if they don’t do biz with SVB. Collateral damage.”

Sudden impact

VCs told VCJ they have been fielding questions about SVB from their portfolio companies — and also reaching out directly to check on them. “It’s been a lot of phone calls just making sure everyone’s OK,” said Richard Munassi, accelerator managing director for Tampa Bay Wave in Florida. “I’m hearing stories about start-ups and VC funds that are now illiquid. I’m very curious to see the ramifications of this. I’m concerned at what their next 90 days look like from a cash-flow standpoint.”

Michele Colucci, managing partner and CEO of DigitalDX Ventures, predicted the fall of SVB would “stifle a lot of innovation.” She added, “I would imagine though that there will be a lot of banks that would love to pick up these game-changing start-ups and their business. They are going to grow and so I think that the bank that actually ensures that these depositors get their funds as much as possible fully refunded and credited will probably be the one that wins that business and wins the future business.”

Although other specialty banks such as Pacific West, Signature and First Republic would like to pick up SVB’s business, steep declines in their share prices on Friday clearly reflect concerns about broader system-wide weakness.

People are wondering why they shouldn’t just go to a top-tier bank that is perceived as having less risk, Mark Volchek, founding partner at Las Olas Venture Capital, told VCJ.

“That’s unfortunate because I do think that specialty banks provide a specific service that is good for start-ups and are more willing to lend and be flexible,” he said. “Clearly all those banks have been very accommodating — opening accounts very quickly if they need an account, considering their credit requests.”

While the question of broader weakness is valid, First Republic’s asset base looks nothing like SVB’s, a source close to SVB and the broader private debt market told VCJ.

“They have almost no venture loans, have a bunch of fixed- and floating-rate mortgages. They have capital they borrow at a fixed rate. They have $60 billion of fixed-rate borrowing capacity at the Federal Home Loan Bank because they’re a mortgage lender,” he said. “On the surface, they’re both tech-focused banks of about the same size and market cap. Under the hood, [there is a] night-and-day difference between the two of them.”

Where there could be similar problems is with others of the roughly 5,500 US banks whose deposits also increased substantially during the pandemic and “that also bought fixed-rate, liquid-security portfolios for whom people also get spooked and pull out deposits,” the source added. “But it’s not going to be a tech-centric thing.”

What will change is that start-ups in need of capital will be forced to pay up for it, he predicted. “Companies that now pay 6 percent for venture debt from a bank will be paying 15 percent from private lenders.” But he doesn’t think that in itself will put companies out of business.

Tan of Y Combinator said on Twitter that SVB’s failure is “an *extinction level event* for startups and will set startups and innovation back by 10 years or more. BIG TECH will not care about this. They have cash elsewhere. All little startups, tomorrow’s Google’s and Facebooks, will be extinguished if we don’t find a fix.”

SVB’s collapse is also expected to make it more difficult for start-ups to access credit. “Deposit amounts above FDIC trading limits may have been tied into corporate loans, working capital facilities or the loans that certain GPs use to fund their capital commitments to funds they manage,” the placement agent told VCJ. “The FDIC will want those loans to keep performing but won’t necessarily want to extend new credit — so VC firms and portfolio companies may have issues accessing new credit in a turbulent market.”

The few start-ups in Las Olas VC’s portfolio that had credit lines with SVB for the most part didn’t draw on them but had them in place as a backup to be able to extend their runways if needed, Volchek said. For the few companies that used their credit facilities at SVB for ongoing business, “we’re really trying to very quickly figure out how to replace those credit lines with another bank,” he said.

Volchek doesn’t expect that process to be hard as other banks have been offering to help. Las Olas had three to five banking bids for funding proposals for past rounds, “so now we’re going back to the ones that didn’t win the business and trying to get a quick replacement for the Silicon Valley Bank credit facilities,” he said.