Startup Businesses Panic as Silicon Valley Bank Goes Under
Early startup companies have a fine line to walk when they get into the very costly position of being a business owner. It’s a very delicate balance between money management and careful business decisions, all the while striving for nonstop improvement until the company can essentially run itself.
That’s the dream, anyhow, but with a failure rate of 90%, it isn’t easy. We’re sure you can imagine how just one bad financial decision can sink everything. Now, we want you to imagine making no such bad decisions and still losing everything anyway. This is the fear that startup owners are facing when, on March 10th, 2023, Silicon Valley Bank was taken over by the Federal Deposit Insurance Corporation (FDIC) after they ran out of cash. Their assets have been seized and it looks like the death of one of the largest banks in the U.S. is at hand.
How the Crash Happened
Banks have many responsibilities and provide many services, but the one thing it doesn’t want to do is to give out more money than they have. This holds doubly true when you’re handling financials of over half the country’s venture-backed startups. What happened with SVB is a mixture of multiple factors that came to bite them, such as lack of diversification from startup companies and finances in and around the Bay Area, as well as buying bonds back in 2020 to get a higher deposit yield. In the end, the main reason for the bank crashing was this: companies, already under stress from a shaky economy over the past few years, kept withdrawing more and more money until SVB had no more cash to give. SVB had been liquidating assets as things grew worse, but the bank reached its limit.
The Effects of the Crash
Now at the bottom of the empty bag, SVB isn’t likely to recover, and many companies are now scrambling to secure payrolls for their employees. While the bank is known for handling early startups, it also did banking for large-scale corporations, those of which kept a balance exceeding $250,000. When a bank fails, but is insured by the FDIC, clients of the failed bank are guaranteed $250,000 of their own money that they can transfer to a different bank, and hopefully more will trickle in as things get sorted. This safety net provided by the FDIC is reassuring for an individual who owns an account, but not a company that has hundreds of employees to pay every two weeks. The collapse gives them what is essentially a countdown timer to get all their ducks in a row before their businesses go belly-up.
One particularly great shame is that the bank was known for its support of energy and climate tech. Think of the solar industry and companies like it. The climate and energy tech industry as a whole will feel a blow from the loss of Silicon Valley Bank.
Thankfully, one venture firm, Lowercarbon Capital, was willing to extend a safety net to those within its portfolio. Thanks to them, those companies are able to continue paying employees so they can focus on mitigating damage and moving things around. Unfortunately for everyone else outside that net, unless some more firms step up to keep these companies afloat, they’ll be on their own.
— Daily Tidings (@TheDailyTidings) March 11, 2023
The Future of Silicon Valley Bank (If There is One)
Even if Silicon Valley Bank survives this crash, the chances of it ever regaining its reputation and rising back to the top is slim to none. This is something we’ve seen time and time again in the past couple years, only with large cryptocurrency tokens like FTX in recent months. This is the first large-scale bank to have failed since 2008 during the financial crisis. As more and more of these “secure” financial institutions fail, people are starting to lose faith in these companies.
Silicon Valley Bank has been around since October of 1983 and its crash is the second largest in U.S. history after Washington Mutual. If an institution that large and well-established is able to fail, it might be safe to say that this is far from over. If this doesn’t mark the beginning of a recession, we’re not sure what else will, as at the time of failure, it held over 200 billion in assets. As they say, the bigger they are, the harder they fall, and there are those who think that SVB’s crash is too large to recover from.
Update: The Bail
At my direction, @SecYellen and my National Economic Council Director worked with banking regulators to address problems at Silicon Valley Bank and Signature Bank.
I’m pleased they reached a solution that protects workers, small businesses, taxpayers, and our financial system. https://t.co/CxcdvLVP6l
— President Biden (@POTUS) March 13, 2023
The official summaries of the reactions of the US and UK authorities.
The commonality is that #SVB depositors will be made whole, with immediate access to their funds.
The different ways this is being done reflect more than operational issues
There are also differences in…
— Mohamed A. El-Erian (@elerianm) March 13, 2023
With the US #SVB-related bailout going beyond what many expected, markets see it as more than protecting deposits and small #tech
The immediate move in 2-year bonds points to the view that,by treating this as a systemic threat,the #Fed will also retreat from its #inflation battle pic.twitter.com/pwwNgRCtdz
— Mohamed A. El-Erian (@elerianm) March 13, 2023