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What Happened with SVB: a Summary for Ecosystem Builders

A summary of the SVB crisis to help ecosystem builders understand the fallout and what it could mean for their communities

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If you work in or around tech ecosystems, you likely know this weekend was wild

If you haven't had time to catch up on the SVB collapse & the aftereffects, this article focuses on what ecosystem builders need to know to understand the crisis and how it could impact their communities.

Part 1: How Did SVB Get Here?

In 2020-2021, Venture Capital markets were hot - startups in ecosystems across the US were raising a ton of money, and many of them were storing that money in Silicon Valley Bank, a public bank that focuses on startups and tech-adjacent organizations. SVB is a household name in the Valley and they have many partnerships with VC firms and accelerators. As a result, somewhere between 35-50% of venture-backed startups bank fully or partially with SVB.

Over the past few years, SVB invested a ton of this cash into long-term assets, such as government bonds. Banks often invest their customer's deposits - that is how most of them make money, and long-term securities are a fine place to store cash when interest rates are low, as they were for most of 2021-2022. However, 2023 has seen a rise in interest rates as the Federal Reserve has tried to slow down inflation. Higher interest rates caused these assets to start losing value.

In mid 2022, VC markets started to slow down as tech entered into a contraction, caused by consumer behavior shifts, layoffs at the big tech companies, and concerns about young companies with a potential recession on the horizon. Startups raised less money, meaning their deposits with SVB were decreasing as they spent their money but didn't add new funds, and fewer new customers opened accounts. This reduction in deposits meant that SVB started running low on liquid capital to cover their customer's withdraw requests.

On Thursday, SVB announced a $2B fundraise to get more liquid capital to cover withdraws, alongside pretty poor overall earnings. This is not overly dire, but once SVB announced plans to raise equity capital, investors got nervous: not only would existing stocks be worth less if they issued new equity, but investors wondered how bad SVB's financial situation was. Their stock price fell dramatically over Thursday and Friday morning.

VCs caught wind of this, and many big firms told their portfolio companies who banked with SVB to consider taking their money out. Why? Because if everyone requested their money and SVB didn't have enough liquid assets to cover the requests, there is a chance customers couldn't access their cash. Nowadays, wiring money is quick and easy, so many companies started wiring their money to other banks. But then, panic spread, and the advice went from "It might be a good idea to move some money into another bank, just to be safe", to "move all your money out of SVB - now"

The result? A full-on modern bank-run. But unlike the bank runs of yore, the modern ease of requesting and transferring money made this one much worse. By midday Friday, nearly $5 Billion was being transferred out of SVB per hour. The bank did not have enough liquid cash to cover those transfers, and began to spiral. That's when the FDIC (the Federal Deposit Insurance Corporation), stepped in, shut down SVB, and transferred control to California regulators.

In less than 48 hours, the 16th largest bank - and the bank of choice for nearly half of venture-backed tech companies across the US - collapsed.

Part 2: How Were SVB Customers Impacted?

Hence began the tech weekend nightmare. What were the big concerns?

Essentially, unless a company was able to transfer out their money in time, their deposits were frozen. This means they could not use the money in their bank accounts to send or receive any money - all of those transactions were blocked. Without access to their deposits, companies were in a precarious position - business operations could grind to a halt, software could fail, and employees would either have to work without pay or be furloughed. In short, local companies would fail pretty quickly if they couldn't access their cash in the bank for any extended period.

There was a small silver lining - the FDIC ensures all deposits up to $250,000 per customer, meaning that even with SVB shut down, on Monday the FDIC would release up to $250k to any customer who filed a claim. The bad news is that 97% of SVB customers have more than $250k in deposits, and access to the rest of this money was still in flux. From Friday midday to Sunday night, every SVB customer with larger balances had no idea when (or if) they would have access to those funds again.

While $250k is a workable amount for an individual or small business, it is not enough for many startups - the payroll for a company with 30+ people can easily eat up $250k in just one cycle. To make matters worse, payroll is due on Wednesday. The leaders of nearly any company with SVB exposure spent the weekend coming up with a plan for how to survive without access to more than $250k for an unknown period of time.

This was not limited to Silicon Valley - despite the name, SVB's customers are spread across every nearly every single tech ecosystem. Additionally, SVB has a variety of small business and agricultural customers as well across the country. Beyond that, SVB does personal banking, mortgages, and other wealth management, meaning the funds of people across the country were suddenly in limbo. Tech companies, small businesses, and people in many tech ecosystems suddenly had a giant a liquidity crisis on their hands - even though they had cash, they couldn't use it, and they didn't know when they would be able to.

If those deposits were frozen entirely, or held up for more than a few weeks, it would have meant economic catastrophe. Thousands of companies would have shut down for no reason other than they couldn't access their funds. This means dozens (if not hundreds) of thousands of people could not get paid or lose their jobs, and consumer spending would reduce substantially, tipping the economy further towards recession. To make matters worse, many were concerned that there would be massive runs on local and regional banks as other people and business lost confidence in smaller institutions, leading to even more bank failures.

Without quick and dramatic intervention, this could have gone seriously bad, very quickly

Part 3: What Happened to Prevent the Crisis?

Over the weekend, founders, investors, and individuals were preparing for a number of scenarios. In order from as-good-as-it-gets to catastrophe, here's a few:

  1. SVB customers get access to their full deposits on Monday
  2. SVB customers get access to their full deposits sometime this week
  3. SVB customers have access to some of their deposits, but not all, over the next few weeks
  4. SVB customers do not get access to most of their deposits for a few months
  5. SVB customers loose all of their deposits or don't get them for multiple months
  6. Any of the above but it also triggers a massive run on a ton of regional banks and the whole system collapses

If deposits were held up for too long, companies would either go under or have to secure emergency financing. Regardless of how long that tie up lasted, there would be major damage to ecosystems and the broader economy alike. Many ecosystem builders sprinted over the weekend to help companies identify this emergency financing (we'll be writing about those responses later this week). In fact, this article was originally about how ecosystem builders could triage the situation and get capital for their local companies if deposits were held up.

If Scenario 6 occurred? This is what we originally wrote for Scenario 6: "Sorry about this one, but it's a real possibility - people are already identifying smaller and regional banks that could be at major risk if companies & individuals across the US start demanding their money back. Again, very few banks are able to survive a run, and there is a small chance there could be many runs, and then many more banks with liquidity crises, and many more customers who can't access their deposits. If this happens, we really will be facing an economic crisis, and the response from ecosystems will require much more than bridge loans"

But as you can see, we didn't publish an article about how ecosystems can triage the situation, and (as of this writing), our economy isn't in free fall - because we got Scenario 1.

On 6pm on Sunday evening, the Federal Reserve put out a joint statement with the Secretary of the Treasury and the FDIC. The announcement stated the FDIC and Federal Reserve would cover customer deposits, using an existing insurance fund that all banks (not taxpayers) pay into. They made it clear that shareholders would not be covered (the natural risk with investing in public companies), that senior leadership was removed, and the bank would be wound down. This is fundamentally different than the bank bailouts in 2008, where taxpayer money was used to prop up the expenses of banks themselves (not their customers) to prevent them from failing.

If you love government press releases, you can read it in full. If not, here's the key sentence: 

Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

Part 4: What Now?

The FDIC and Federal Reserve were able to prevent immediate economic catastrophe by getting customers their deposits back the first day of the week. By 8pm on Monday, all SVB of customers have recovered their funds. In many ways, local companies and ecosystem builders can both breath a sigh of relief - in another world, this week would have been chaos.

What does this mean for local ecosystems? We take a look at the damage caused by SVB and the three biggest impacts on local ecosystems in the next article.

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