Following the collapse of Silicon Valley Bank last week, many businesses and entrepreneurs have fled to – or at least perceived – safety. That means larger banks received more deposits: JPMorgan Chase, Bank of America, Citigroup and Wells Fargo.
“Everyone is asking: Where should we cash in? Where is it safe to bank? Ryan Gilbert, Founder of Launchpad Capital, said Silicon Valley Business Journal. “When you think you’re dealing with the safest bank in your ecosystem and it disappeared overnight, you realize that predicting an earthquake is impossible.” He moved his account to Chase.
“Where should we cash in? Where is it safe to bank? »
start-up like Brex, Mercury and Meow also benefited. Brex specializes in corporate credit cards; Meow, by allowing people to earn interest on government bonds, among other services. (Meow also gives accounts to people at BNY Mellon Pershing, another big bank.) “We’ve been inundated with inbounds, and we’ve been working non-stop,” Meow CEO Brandon Arvanaghi told me during an interview. ‘a telephone interview. It’s not just startups or SVB customers, even if it was the first wave, he says.
“Everyone starts thinking about counterparty risk,” says Arvanaghi, which is the risk that someone you’re making a deal with doesn’t live up to their end of the bargain. If a bank fails, the FDIC is not obligated to honor its loan agreements, for example. In the case of SVB, the bank also said he would honor his debts — not a certainty a week ago! – and even makes new loans.
Some companies place capital in several banks to hedge their bets. But that’s not exactly ideal either. Banks tend to pay more attention to customers who keep a lot of money in their accounts, says Matt Cohen, a VC at Ripple Ventures in Toronto. In addition, it is too difficult to distribute the payroll over several accounts.
The longer-term results here are hard to sort through. SVB will likely be sold, in whole or in part, although probably not at a big bank. Cohen told me he fears the losers in all of this will be the regional banks and that when the dust settles the big banks will simply have gotten bigger.
“We don’t know how much big banks want startups to bring in.”
What this means for the startup economy is unclear. Startups are different from other businesses because they usually burn capital – there is usually a large injection of money at account opening which gradually decreases. Mature companies, on the other hand, have more money. And SVB was more willing to work with startups than most other banks. “We don’t know how much big banks want startups to bring them,” says Arjun Kapur, co-founder of Forecast Labs.
Kapur told me he expects to see more caution in startups and more rigor. Startups were already cutting costs in response to the weirdness that had plagued the economy for about a year — it might make sense to expect companies to spend less money on marketing and other things until let everyone know what is really going to happen.
It may also mean more layoffs, says Tanner Hackett, CEO of Counterpart Insurance, which provides insurance for small businesses. If companies are struggling to raise new funding rounds or access new debt in the wave of SVB failure, finding a path to profitability will be more urgent, he told me. He expects companies to take a conservative approach to managing their money.
Then there is the issue of the Federal Reserve. The Fed has aggressively raised interest rates in an attempt to control inflation. The collapse of SVB, along with crypto-banks Silvergate and Signature, could prevent the Fed from continuing to raise interest rates — or at least slow the rate at which rates rise.
Meanwhile, the VCs bicker
The Fed was also the supervisor of Silicon Valley Bank, a job where it seems to have failed, former Fed Governor Daniel Tarullo said Bloomberg. It’s unclear to what extent what happened at SVB can be attributed to a 2018 rule change that relaxed requirements for regional banks, though the Fed is investigating itself and will report in May.
“We need to be humble and give a careful and thorough review of how we have overseen and regulated this business,” said Michael Barr, who will lead the Fed’s action reviewin a report.
Meanwhile, the VCs bicker. A declaration of 600 venture capital companies called the bank run “deeply disappointing” and encouraged portfolio companies to resume banking with SVB.
The notoriously Peter Thiel Founders Fund tells his companies to withdraw their money, and while it’s not the only company encouraging withdrawals, the Founders Fund partner Trae Stephens seemed to confirm that the group was a key influence in the bank run. There are also rumors floating around that Thiel deliberately bet against SVB. This is probably why someone from Founders Fund contacted Axios for damage control: someone – I can’t imagine who! – research let everyone know that Thiel was not part of that decision.
Either way, the blame game continues because it’s not just Founders Fund that stabbed SVB. “Further speculation suggests that Sequoia and a16z then followed Thiel’s lead and urged their holding companies to pull their money from SVB,” wrote William Cohan in Puck. “There were also reports that as early as December, Fred Wilson, the New York venture capital industry dean at Union Square Ventures, started telling his portfolio companies to steer clear of SVB.”
The instability may not be over. NOW Credit Suisse looks shaky – and while it’s not as tech-focused a financial institution as SVB, it’s big enough to make waves in the money world. The Swiss central bank has intervened to say so will provide liquidity if necessary, but nerves seem to be raw in the banking world, in general. A problem with bank runs? They can lead to more bank runs.
“I want to formally thank my peers in the venture capital community whose outstanding leadership over the past 48 hours has sparked a deposit rush at Silicon Valley Bank, ultimately toppling one of our most important institutions. ecosystem,” said Brad Svrluga, a seed investor, on Twitter. “The ultimate failure is due to hysterical VC social media incitement that undermined our shared ecosystem. This has been a stunning failure of leadership.