On Wednesday, Silicon Valley Bank was a well-funded business that wanted to bring in more money.
Within 48 hours, the bank’s 40-year run ended because of panic in the venture capital community that Sillicon Valley Bank had served and helped grow.
Friday, regulators shut down the Sillicon Valley Bank and took all of its deposits. This is the largest U.S. bank failure since the massive financial crisis of 2008 and the second-largest ever. The company started going downhill late on Wednesday when it told investors that it needed to raise $2.25 billion to fix its balance sheet. After that, a well-known bank that had grown along with its technology clients quickly went bankrupt.
Even now, as the dust is starting to settle on the second bank closing announced this week, venture capitalists are still upset about the role other investors played in SVB’s failure.
Ryan Falvey, an investor at Restive Ventures, told CNBC, “This was a bank run caused by VCs out of fear.” “This is one of the best examples of an industry cutting off its nose to spite its face.”
The event is the latest result of the Federal Reserve’s efforts to stop inflation by raising interest rates in the most aggressive way it has in the past 40 years. As a result, there are worries that startups may not be able to pay their employees in the next few days, those venture investors may need help getting money, and that an already troubled sector could get worse.
Higher rates caused changes in the market that led to SVB’s failure. As startup clients withdrew deposits to keep their businesses going in a tough time for initial public offerings (IPOs) and private fundraising, SVB ran out of money. As a result, the bank said late Wednesday that it had to sell all of its available-for-sale bonds at a loss of $1.8 billion.
After the crypto-focused Silvergate bank collapsed, there was a sudden need for more money. This led to another wave of deposit withdrawals on Thursday, when venture capitalists told the companies they owned to move their money. The worry is that a bank run at SVB could make it impossible for startups to use their deposits.
During a call that started Thursday afternoon, SVB customers said CEO Greg Becker didn’t make them feel better when he told them to “stay calm.” The stock kept falling, and by the end of regular trading, it was down 60%. Someone on the call said that Becker couldn’t promise that this would be the last time the bank would need to raise money.
A California regulatory filing shows customers withdrew a huge $42 billion deposit by Thursday.
At the end of that day’s business, Silicon Valley Bank had a negative cash balance of $958 million, according to the filing. The regulator said that the bank needed help finding enough collateral from other sources.
Falvey, a former Sillicon Valley Bank employee who started his fund in 2018, said that the fact that the tech investing community is so connected was a big reason why the bank went out of business so quickly.
In the past few days, big funds like Union Square Ventures and Coatue Management sent emails to all of their startups telling them to withdraw their money out of SVB because they were worried about a bank run. He said that social media only made things worse.
Spencer Greene, a partner at TSVC, is also a venture capitalist. He said investors who were “wrong on the facts” about SVB’s position were bad investors.
“Everything as usual”
Some Sillicon Valley Bank customers got emails Thursday night telling them everything was “business as usual” at the bank.
David Faber of CNBC said that on Friday, as Sillicon Valley Bank shares continued to fall, the bank stopped trying to sell them. He said that instead, it was looking for a buyer. But the loss of deposits made it harder to sell, and Faber said that effort also failed.
Falvey started his career at Wells Fargo and worked as a consultant for a bank that was taken over during the financial crisis. He said that SVB’s mid-quarter update from Wednesday gave him confidence after he looked at it. He said the bank had enough money to pay back everyone who had put money in it. As rumors spread, he even told the companies he worked with to keep their money at the Sillicon Valley Bank.
Read Also: Silvergate hit with $8bn in crypto withdrawals
People who kept their money at the Sillicon Valley Bank after the bank run that led to its seizure are still determining when they’ll be able to get it back. Even though insured deposits could be available as early as Monday, most of them held by the Sillicon Valley Bank were not insured, and it is still being determined when they will be released.