The Collapse of Silicon Valley Bank (SIVB), Need to Know's

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The Collapse of Silicon Valley Bank (SIVB), Need to Know’s

Silicon Valley Bank’s collapse has left many startups scrambling for cash, and has further hobbled a sector that has struggled with a sharp slowdown in venture funding and broader economic woes. The sudden collapse could spur founders to become more capital efficient and rethink their risk strategies.

What You Need to Know About the Collapse of Silicon Valley Bank (SIVB)

The sudden collapse of Silicon Valley Bank, long a linchpin of tech financing, has left many startups scrambling to line up sources of cash for payroll and other immediate needs. The bank’s demise will likely further accelerate the shift away from high-risk and aggressive growth strategies that startups embraced during the decades-plus bull market that ended last year, according to longtime startup investors.

Many of the roughly 3,000 active companies associated with Y Combinator, a startup accelerator in Silicon Valley, had a relationship with Silicon Valley Bank, and nearly 400 had said they had exposure and over 100 said they worried they couldn’t make payroll over the next 30 days without a quick resolution for the bank.

The federal seizure of Silicon Valley Bank came after startups started pulling their money out of the bank on Thursday to avoid potential losses on deposits in excess of the amount insured by the federal government. Those withdrawals, encouraged by some venture investors, sparked a classic bank run, dooming the tech lender’s plans to raise fresh capital and stave off collapse.

The FDIC said depositors with funds exceeding the insurance cap of $250,000 would get receivership certificates for their uninsured balances, meaning that those with large deposits stuck at the bank may not get their money out soon.

Some established tech companies also had business with the bank, including streaming platform Roku Inc., which said it had about $487 million of its $1.9 billion in cash and cash equivalents at SVB as of March 10. Those deposits are uninsured, Roku said in a filing, adding it doesn’t know how much of those deposits it will be able to recover.

Silicon Valley Bank occupies an unusually central place in the startup landscape after having spent years building itself out as a financial hub for many startups and venture-capital firms.

The collapse of SVB has left many in the tech community hoping that the FDIC will find a buyer over the weekend who can help backstop the many tens of billions of uninsured deposits held at the bank, limiting losses. Meanwhile, some venture firms have considered issuing emergency funding to their startups in an effort to prevent them from running out of cash, investors say.

Main Takeaways

The Collapse of Silicon Valley Bank

  • Deposits in Silicon Valley Bank were locked up when federal authorities took control Friday morning.
  • Many founders are now uncertain about the immediate future of their businesses.
  • The bank’s sudden collapse has further hobbled a startup sector that has struggled with a sharp slowdown in venture funding and broader economic woes.
  • Its demise will likely accelerate the shift away from the high-risk and aggressive growth strategies that startups embraced during the decades-plus bull market that ended last year, according to longtime startup investors.

Impact on Startups

  • Many of Y Combinator’s roughly 3,000 active companies had a relationship with Silicon Valley Bank.
  • Nearly 400 companies had exposure to Silicon Valley Bank and over 100 said they worried they couldn’t make payroll over the next 30 days without a quick resolution for the bank.
  • The companies most affected by this aren’t major tech companies, but smaller startups that were founded in the past few years.
  • Videogame company Roblox said about 5% of its $3 billion of cash and securities balance as of Feb. 28 were with SVB.
  • Streaming platform Roku Inc. said it had about $487 million of its $1.9 billion in cash and cash equivalents at SVB as of March 10. Those deposits are uninsured, Roku said in a filing, adding it doesn’t know how much of those deposits it will be able to recover.
  • The federal seizure of Silicon Valley Bank came after startups started pulling their money out of the bank on Thursday to avoid potential losses on deposits in excess of the amount insured by the federal government. Those withdrawals, encouraged by some venture investors, sparked a classic bank run, dooming the tech lender’s plans to raise fresh capital and stave off collapse.

Hopes for a Resolution

  • Some in the tech community said they were holding out hope that the FDIC would find a buyer over the weekend who can help backstop the many tens of billions of uninsured deposits held at the bank, limiting losses.
  • Meanwhile, some venture firms have considered issuing emergency funding to their startups in an effort to prevent them from running out of cash, investors say.
  • Many founders are trying to determine what to make of the news that the bank had so swiftly gone out of business.

Lessons for Founders

  • Silicon Valley Bank’s collapse could spur founders to diversify deposits and become more capital efficient.
  • Startups should always have at least three months of available cash at multiple financial institutions.
  • Founders need to be more sober about how they think about risk.

The sudden collapse of Silicon Valley Bank has sent shockwaves through the startup community, and its impact is likely to be felt for some time. As startups struggle to come to terms with the situation, many are taking steps to ensure they are better prepared for similar events in the future. For now, all eyes are on the FDIC as it seeks to find a resolution to this crisis.

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