Business

What we know about Silicon Valley Bank failure

On the final evening of its existence, Silicon Valley Bank hosted VC Bill Reichert of Pegasus Tech Ventures, delivering a speech on “How to Pitch You WOW! to Investors” to roughly 45 or 50 individuals. The scene was described to me by OmniLayers CEO Mike McEvoy. He responded, “That seemed creepy over there. He noticed some guests who appeared glum were seen leaving the premises during the occasion.

There was also Roger Sanford, the self-described “professional Silicon Valley gadfly” and CEO of Hcare Health. He told me that everyone was living in denial. “The band kept playing.”

After Washington Mutual in 2008 was the second-largest bank failure in American history, regulators closed the iconic bank of the technology sector the following day.

What transpired is straightforward and a little convoluted; I’ll explain further. A bank run happens when depositors attempt to withdraw all their money at once, as in It’s a Wonderful Life. Furthermore, as It’s a Wonderful Life indicates, sometimes the money isn’t available right away since the bank utilized it for something else. That was the immediate cause of death for the internet industry’s most structurally and symbolically significant bank, but several other events had to take place first for that to happen.

Silicon Valley Bank: What is it?

Before its demise, Silicon Valley Bank, which was established in 1983 as the result of a poker game, was the 16th largest bank in the US and a key driver of the growth of the technology sector. Because nerds are idolized in the tech sector, it’s simple to forget that money, not intelligence, drives businesses.

Silicon Valley Bank provided that fuel, collaborating closely with numerous firms with VC funding. It claimed that it was the “go-to bank for investors” and the “financial partner of the innovation economy.” The company that owns this website is one of the clients of SVB. Not only that. More than 2,500 VC firms and numerous tech executives banked there.

In less than 48 hours, it collapsed.

What transpires to the consumers of Silicon Valley Bank?

The Federal Deposit Insurance Corporation (FDIC), a federal organization that has existed since the Great Depression, ensures the majority of banks. Naturally, the FDIC insured the accounts of Silicon Valley Bank, but only up to $250,000. FDIC deposit insurance operates in this manner.

That amount of money can be substantial for a person, but in this case, we’re talking about businesses. Many have monthly burn rates in the millions of dollars. According to a recent regulatory filing, as of December 2022, nearly 90% of deposits were uninsured. The number of uninsured deposits when the bank closed was “undetermined,” according to the FDIC.

How terrible might it be?

Cash flow problems of any size can significantly impact people, businesses, and entire sectors of the economy. The uninsured depositors will eventually be made whole, which is a highly likely outcome, but the issue is that they don’t currently have access to that money.

Payroll is where the impact is felt the fastest. Many people are concerned about whether their next payment will be delayed. Some workers already know when their pay Checks will arrive; Rippling, a payroll service provider, had to inform its clients that certain wages weren’t arriving on schedule due to the SVB bankruptcy. For other employees, that means missed rent or mortgage payments and money for unpaid gas, groceries, or childcare.

For startups, this is especially difficult. According to YC CEO Garry Tan, a third of Y Combinator startups won’t be able to pay their employees in the following 30 days. Since you can’t make sales if your salesforce isn’t showing up to work, a sudden mass furlough or layoff is a nightmare for most businesses.

Some investors are giving their businesses loans so they can pay their employees. The largest shareholder in Vox Media, the parent firm of this website, Penske Media, informed The New York Times that “it was prepared if the company needs additional financing,” for example. This is advantageous because Silicon Valley Bank is home to “a considerable concentration of cash” owned by Vox Media. Of course, the fact that many investors were also banking at SVB presents another issue.

Paying for software, cloud services, and other expenses is another expense a business faces in addition to payroll. Here, I’m barely scraping the surface.

Is there a connection to cryptocurrency here?

Although SVB’s failure was not directly related to the current crypto disaster, it may have contributed to it. The stablecoin USDC is run by cryptocurrency company Circle and is backed by $3.3 billion in cash reserves held at Silicon Valley Bank. Its value should always be $1, but once SVB failed, that stablecoin lost its peg and fell as low as 87 cents. Coinbase has halted conversions from USDC to dollars.

Circle stated it “would stand behind USDC and offset any gap utilizing business resources, incorporating external capital as necessary” on March 11. Much of the stablecoin’s value was restored, and also $227 million in funds from the defunct cryptocurrency lender BlockFi are stranded.