Silicon Valley Bank, a well-capitalized institution, was seeking to raise $2.25 billion to shore up its balance sheet.
However, within 48 hours of the announcement, a panic induced by the venture capital community that the bank had served and nurtured for 40 years ended the bank’s run.
Regulators shut down SVB on Friday and seized its deposits, making it the largest US banking failure since the 2008 financial crisis and the second-largest ever.
This event is the latest fallout from the Federal Reserve’s actions to stem inflation with its most aggressive rate hiking campaign in four decades, and the ramifications could be far-reaching.
SVB’s collapse began when startup clients withdrew deposits, forcing SVB to sell all of its available-for-sale bonds at a $1.8 billion loss, which put the bank short on capital.
The sudden need for fresh capital sparked another wave of deposit withdrawals as VCs instructed their portfolio companies to move funds, fearing a bank run at SVB could pose an existential threat to startups who couldn’t tap their deposits.
Customers withdrew a staggering $42 billion of deposits by the end of Thursday, leading to a negative cash balance of $958 million by the close of business that day.
Prominent funds blasted emails to their entire rosters of startups, instructing them to pull funds out of SVB on concerns of a bank run, further heightening the panic.
As shares of SVB continued to sink, the bank ditched efforts to sell shares and was looking for a buyer. However, the flight of deposits made the sale process harder, and that effort failed too.