Startup leaders and tech investors cheered the U.S. government’s promise this weekend to fully protect both insured and uninsured Silicon Valley Bank deposits. But the bank’s demise left many unresolved questions and challenges for the U.S. financial system and the tech industry in the days and months ahead.
So what’s next? That question is the focus of this special episode of the Startup Podcast, which we recorded late Monday afternoon with two venture capitalists: Kirby Winfield, founding general partner of Seattle venture capital firm Ascend; and Aviel Ginzburg, general partner at Seattle VC firm Founders’ Co-op.
Speaking with Startup co-founder John Cook, they cited looming challenges:
Banking will become more cumbersome for many startups.
Among startup executives and investors, Silicon Valley Bank was known for being easier to work with than many larger financial institutions, given its decades of experience specializing in venture-backed startups. Basic financial activities like wiring money will become more complicated in many situations.
Basic cash management will also become more complex.
Silicon Valley Bank’s downfall illustrated the importance of spreading cash among multiple banks to minimize or avoid balances in excess of the $250,000 limit on FDIC insurance. Many startups have been scrambling to address this issue.
Startups counting on venture debt in 2023 may be out of luck.
As of Monday afternoon, Ginsburg said startups that have tapped into their venture debt aren’t likely to have the funds taken back before the loans come due, while those who haven’t may see this borrowing capacity taken away.
This could translate into additional tech layoffs later this year.
Combined with the decline in venture capital investing in recent months, triggered by rising interest rates, an inability to access venture debt would be a “double whammy” with “reverberations throughout the ecosystem,” Ginsberg said.
[Update: In a memo sent Tuesday morning, Tim Mayopoulos, the CEO of newly established Silicon Valley Bridge Bank, said “we are making new loans and fully honoring existing credit facilities.”]
Much of the outcome is still in flux.
The government’s promise to protect all deposits was a relief, but it wasn’t the end of the story. As illustrated by the uncertainty about venture debt, many key secondary details will depend on which banks or investors end up with SVB’s assets through an auction reportedly under way as part of the FDIC receivership.
Speaking on the podcast, Winfield and Ginsburg also cited some silver linings:
The crisis has been a useful stress test for startup founders.
“This was this exogenous event where you got to see, right away, which founders were on top of their shit, which founders were communicating with their teams, which founders had a plan in place, or the ability to create a plan quickly,” Winfield said.
He added, “I’ll tell you, a lot of founders did. It makes you feel really good as an investor, when it’s been two, three, four years since you wrote that first check, and you can see someone step up.”
The bank failure helped to put other startup challenges in perspective.
This one is clearly coming from the perspective of an investor. But after surviving a bank collapse, startup leaders should be able to look at normal challenges and say, “Well, that’s better than my bank losing all my money,” Ginzburg said.
For example, some startup leaders are wringing their hands over the prospect of future “down rounds,” the phrase for fundings at lower valuations or less favorable terms than in the past.
Winfield agreed. “It totally reframes things,” he said.
This could be the first step toward a venture capital rebound.
Startup investors may “loosen up the purse strings” if interest rates stabilize later this year, providing more predictability in the markets, Winfield said, explaining this optimistic hypothesis.
A key component in SVB’s demise was its sale, at a $1.8 billion loss, of bonds devalued by rising interest rates.
“There’s a school of thought that says the Fed was going to keep bumping rates until something broke,” Winfield said. “Well, something broke. It was Silicon Valley Bank.”
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