While many startup founders and investors slept easier Sunday night knowing their deposits at Silicon Valley Bank were safe, the rapid meltdown of the 40-year-old institution could have short- and long-term ripple effects on the tech startup industry.
Startup spoke with startup CEOs and investors to get their reaction to the government’s decision to backstop deposits and what changes they expect as a result of the bank’s sudden collapse.
The Federal Deposit Insurance Corporation said Monday it transferred all deposits to a newly created bridge bank to protect both insured and insured depositors.
The move provided peace-of-mind for startup leaders nationwide who spent their weekend scrambling for solutions in response to a bank run that made Silicon Valley Bank insolvent last week. Some CEOs were worried about making payroll this week.
“The government did the right thing and prevented an extremely painful scenario,” said William Canestaro, managing director of Washington Research Foundation.
Here’s what we learned:
- Some startup founders are spreading their cash across multiple bank accounts to mitigate the risk of another bank failure, turning to giant institutions like JPMorgan Chase and Bank of America.
- Fundraising might become even more difficult for startups. Silicon Valley Bank was one of the top providers of venture debt and other credit facilities.
- There could be some silver linings. One venture capitalist is optimistic that the Federal Reserve will reduce interest rates as a result of the failure.
Finding a new bank
Devin Ajimine, co-founder and CEO of Seattle-based productivity startup LifeAt, said he and other founders have started to diversify where their capital is held. He said the broader impact will be the risk tolerance for people to join and launch startups.
“No one wants to ever wake up (and not know) where millions of dollars of operational capital is locked or whether the company you work for will make payroll next week,” he said.
The outcome of this migration could lead to a significant movement toward safety by depositors and favoring of established large banks, said Daniel Li, co-founder and CEO of Marble.
As a consequence, startups may have fewer options when it comes to selecting banks, potentially limiting their choice to larger institutions and excluding smaller regional banks that could offer unique advantages, he said.
Shares of some regional banks were halted Monday after their prices dropped in morning trading.
It’s unclear which bank will become the institution of choice for startups, Canestaro said.
An estimated 80% of Seattle’s venture-backed technology and life sciences firms banked with Silicon Valley Bank, putting the region’s innovation sector at a higher risk than the national average of about 50%.
“The impact of losing SVB will be with us for a long time to come,” said Bob Crimmins, a longtime Seattle startup investor. He called SVB a “stalwart fixture of the venture-scale startup world.”
Other banks could seize on an opportunity to serve SVB customers, Canestaro said. Brex, for instance, received billions of dollars in Silicon Valley Bank deposits Thursday.
Venture debt lender
Silicon Valley Bank offered a range of services geared to startups that weren’t available at more traditional banks, said Dennis Joyce, director of investments at Tacoma Venture Fund.
The bank was a leading provider of venture debt, a type of capital that helps extend cash runway. The closure of this bank coincides with a slowdown in the venture capital markets, raising concerns that startups may face increased difficulty in securing funding.
SVB has around $14 billion in venture debt as part of its assets.
The hurdle for bank loans and other forms of debt financing will be a “different world going forward,” Wedbush Securities Managing Director Daniel Ives wrote in a report Sunday evening.
Impact on investors
Many have called out SVB for its own missteps that created anxiety in the markets. But there will be increased scrutiny of the influence of tech investors, said Canestaro.
“There will be some serious soul-searching about whether we are comfortable with a few investors that can cause a market panic by telling their portfolio companies to pull all their cash out,” he said. “Like yelling ‘fire’ in a theater, we’re all harmed when those in positions of power and influence don’t keep a level head.”
Crimmins said he has never seen a more concentrated wave of fear and anxiety descend on the startup ecosystem. “The startup world was spooked into driving a fully operational car over the cliff,” he said.
While some investors fear the bank closure could further push startup investing downward, others are optimistic that it could go in the opposite direction.
The bank’s collapse could cause the Federal Reserve to ease interest rate hikes, re-igniting investor sentiment in the venture capital market, said Kirby Winfield, founding general partner of Seattle venture capital firm Ascend.
“This may actually be a blessing in disguise,” he said. “If rates stop increasing (as they must now do), I’d bet investors will resume typical deployment pacing with confidence of a more capital-friendly environment in the near to medium-term.”
Founders’ Co-op General Partner Aviel Ginzburg tweeted Sunday evening that he resumed investing activity by signing a SAFE (simple agreement for future equity) that will wire Monday.
“What a way to end the weekend,” he wrote.