On Wednesday, Silicon Valley Bank was a well-capitalized institution seeking to raise some funds. Within 48 hours, a panic induced by the very venture capital community that SVB had served and nurtured ended the bank’s 40-year-run.
On Friday, regulators closed SVB and took control of its deposits, marking the largest banking failure in the United States since the 2008 financial crisis and the second-largest ever. The downfall of the esteemed bank, which had experienced significant growth alongside its technology clients, commenced on Wednesday when it unexpectedly announced the need to raise $2.25 billion to strengthen its financial position. Consequently, the bank rapidly collapsed.
As the aftermath of this week’s second bank shutdown unfolds, members of the venture capital (VC) community are expressing regret over the involvement of other investors in SVB’s demise. Ryan Falvey, a fintech investor at Restive Ventures, stated that the downfall of SVB resulted from a frenzy-driven bank run caused by VCs. He believes that this incident will be remembered as a prime example of an industry sabotaging itself.
Interest Rate Hike and SVB’s Capital Shortage
The current situation represents the most recent consequences of the Federal Reserve’s efforts to curb inflation through an unprecedented campaign of raising interest rates, which is the most aggressive in forty years. The potential impacts could extend widely, with worries emerging that startups might face difficulties in meeting employee payments in the near future, venture investors may encounter challenges in securing funds, and the already-struggling sector could experience a further downturn.
The collapse of SVB can be traced back to disruptions caused by higher interest rates. As startups faced challenging conditions for initial public offerings (IPOs) and private fundraising, they began withdrawing their deposits from SVB in order to sustain their operations. Consequently, SVB faced a shortage of capital. On Wednesday, the bank disclosed that it had been compelled to sell all its available-for-sale bonds, resulting in a loss of $1.8 billion.
The sudden requirement for fresh capital, following the recent collapse of Silvergate bank that focused on cryptocurrencies, triggered another round of deposit withdrawals on Thursday. Venture capitalists (VCs) instructed their portfolio companies to move their funds, as they were concerned that a bank run at SVB could pose a significant threat to startups that relied on their deposits.
Customers of SVB expressed a lack of confidence in CEO Greg Becker, especially when he urged them to remain calm during a conference call that commenced on Thursday afternoon. The stock of the bank continued its downward spiral, ultimately plummeting by 60% by the close of regular trading. Importantly, Becker was unable to provide assurance that the capital raise would be the bank’s final measure, as reported by an individual participating in the call.
According to a regulatory filing in California, customers withdrew an astonishing $42 billion in deposits by the end of Thursday. The filing revealed that by the close of business on that day, SVB had a negative cash balance of $958 million and was unable to secure sufficient collateral from other sources, as stated by the regulator.
Ryan Falvey, a former SVB employee who established his own fund in 2018, highlighted the interconnected nature of the tech investment community as a crucial factor contributing to the sudden collapse of the bank. Prominent funds such as Union Square Ventures and Coatue Management sent emails to all their portfolios of startups, instructing them to withdraw funds from SVB due to concerns of a potential bank run. Falvey emphasized that social media further amplified the panic.
Falvey likened the act of urging startups to withdraw their deposits by saying, “Hey, get your deposits out, this thing is gonna fail,” to yelling “fire” in a crowded theatre. He believed that such actions created a self-fulfilling prophecy.
Greene expressed his observation that there seemed to be no liquidity problem until a couple of venture capitalists (VCs) raised concerns. According to him, the actions of these VCs were irresponsible and ultimately led to a self-fulfilling prophecy.
Continuity in operations
On Thursday evening, certain customers of SVB received emails assuring them that the bank was operating normally. One SVB banker, as per a message obtained, wrote to a client to provide context amid the market buzz surrounding SVB. The banker stated that it was “business as usual” at SVB and expressed availability to address any concerns the client may have.
However, by Friday, as SVB’s shares continued to decline, the bank abandoned its attempts to sell shares, as reported. Instead, SVB shifted its focus to finding a buyer. Unfortunately, the flight of deposits complicated the sale process, resulting in its failure, according to Faber’s report.
Falvey, who began his professional journey at Wells Fargo and provided consultation for a bank that was seized during the financial crisis, expressed confidence in his analysis of SVB’s mid-quarter update on Wednesday. According to him, the bank had sufficient capital and could fully reimburse all depositors. Despite swirling rumours, he even advised his portfolio companies to maintain their funds at SVB.
However, as a result of the bank run that ultimately led to the seizure of SVB, those who chose to remain with the bank now face an uncertain timeline for retrieving their funds. While insured deposits are expected to be accessible as early as Monday, the majority of deposits held by SVB were uninsured, and it remains unclear when they will be released.
The California financial regulator stated that the swift withdrawal of deposits has rendered the bank incapable of meeting its financial obligations. Consequently, the regulator declared that the bank is now insolvent.
Silicon Valley Bank’s abrupt failure, driven by a capital shortfall and panic-induced withdrawals, is the largest U.S. banking collapse since 2008. The tech investment community’s actions, urging startups to withdraw funds, created a self-fulfilling prophecy. The aftermath raises concerns for startups, venture investors, and the broader financial sector.