Silicon Valley Bank failure and its effects on the Startup industry

The Silicon Valley Bank (SVB) was shut down in March 2023 by the California Department of Financial Protection and Innovation. Before that it was the 16th largest bank in the US and has been a crucial part of the startup ecosystem in Silicon Valley, providing critical financial services to growing businesses, particularly in the tech industry. Those services ranged, from traditional banking products like checking and savings accounts, to more specialized offerings like venture debt and equity financing. The SVB was the largest bank to fail since the Washington Mutual closed during the financial crisis of 2008. 

Between 2019 and 2022 the bank saw a lot of growth and therefore had a big number of deposits and assets. Only a small amount of these deposits was held in cash while the rest was used to buy treasury bonds and other long-term debt. These tend to have less return but come with a lower risk. 

As the interest rate was raised by the Federal Reserve these initially low risk investments became riskier. Since investors now bought bonds at higher interest rates, the SVB bonds declined in value. At the same time, customers of the bank got into financial troubles and therefore began to withdraw their funds from the accounts. These large withdrawals had to be accommodated and to do so the Bank decided to sell some of its investments. As soon as investors became aware of such vulnerabilities, customers that had in excess of $250,000 (more that the secured value) of depositis ran to the bank to get their uninsured deposits out. 

On March 9th 2023 the stock for the SVB’s holding company (SVB Financial Group) crashed at the market opening. More and more customers started withdrawing money. On the 10th of March 2023, trading was halted for SVB Financial Group stock. Before the bank opened that day, federal regulators took over. 

Since the regulators were unable to find a buyer, deposits had to be moved to a bridge bank owned by the FDIC, with the promise that deposits, that were insured would be available by March 13th. On March 12thhowever, regulators announced emergency measures, allowing customers to recover all funds, including those that were uninsured. 

SVB Financial Group filed for bankruptcy on March 17th and on March 26th the First Citizens Bank bought the rest of the Silicon Valley Bridge Bank except for $90 billion of securities that remained in FDIC receivership. 

It was uncommon to announce that all depositors in SVB would be made whole – so what was the reason for this promise?

One of the reasons was the involvement of countless tech companies banked with SVB, that the US government wanted to evade the difficulties to spill over to the tech sector. Another reason was the fear of contagion and that therefore uninsured depositors of other banks would be tempted to run their banks. Furthermore, usually monetary authorities would reduce the interest rate and put more money into the banking system to help it regain its balance. But in this case, since inflation had to be tamed, it was not possible to do so. 

Even though investors got their deposits back, the quick meltdown of the SVB will most likely have short and long-term effects on the tech startup industry. Some founders for example are spreading their cash across multiple bank accounts to reduce their risks. The result could be that depositors will now favor established larger banks. Startups therefore would have fewer options when it comes to selecting banks, excluding smaller regional banks that could offer some advantages. Additionally, it might become even harder to fundraise for startups. SVB was a leading provider of venture debt, which is a loan to an early-stage company that provides liquidity to the business for the period between equity funding rounds. The closure of the bank happened simultaneously to the reclining of venture capital markets. This raises concerns as to how startups will get secure funding in the future. 

Although some investors fear that this incident could push startup investing further downwards, others are more optimistic and believe that it could actually go in the opposite direction. Only the future will tell, if and how the startup industry will recover from this incident. 


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