Silicon Valley Bank Burst – What Went Wrong?

In Brief: What Happened at SVB Financial, what it means for the rest of us, and why should we worry about it?

Silicon Valley Bank became the largest bank failure since Washington Mutual in 2008. A tumultuous week saw the lender’s attempts to raise capital fall short and a cash exodus from the tech startups that had fueled the lender’s rise.

Despite quadrupling in size over the past five years, it had been valued at more than US$40 billion just one year ago before regulators seized it on Friday.

Banks were already suffering from the jump in rates that eroded the value of their portfolios. In addition, customers in the technology and crypto startup worlds were shedding cash amid a slump in their businesses. In SVB’s case, the turmoil fed on itself as customers worried about its health rushed to withdraw money. Problems mounted for SVB after high-profile venture capital firms advised their portfolio companies to pull money from the bank.

Its assets at the end of last year were approximately US$209 billion, while its deposits were approximately US$175.4 billion, according to FIDC on March 10, 2023.

Furthermore, the actual impact will begin to take effect next Monday, March 13, 2023. There will be the day when customers can start coming to the bank and begin withdrawing the rest of their money.

What was Silicon Valley Bank to the world of startups and venture capital? Practically everything.

SVB provides checking accounts, credit cards, and money market accounts that have an annual percentage yield as high as 4.5%. The company is also able to assist merchants in accepting payments for sales, issuing invoices, managing subscriptions, and establishing monthly billings by providing payment processing and payment management services. As part of its financial advisory roles, the bank’s securities division offers a range of services to healthcare and tech-focused companies, such as M&A advisory, equity and debt capital markets, proprietary research, sales and trading, and equity and debt capital markets brokerage services.

Additionally, SVB is widely regarded as a pioneer of venture debt, a type of loan offered by both banks and nonbank lenders specifically tailored to early-stage and high-growth businesses with the assistance of venture capital funds.

SVB also behaves as an investor who invests in other investors. For more than two decades, the company has invested directly in a number of fund managers and portfolio companies through its venture capital and credit investment arm.

What really happened?

It was not credit problems that led Silicon Valley Bank to collapse, but rather an old-fashioned mismatch of assets and liabilities that doomed many thrifts in the 1970s.

The panic movement started on Thursday after SVB announced that it was seeking to raise capital rapidly to cope with the massive withdrawals of its customers, but was unable to do so and ended up selling its available-for-sale financial securities for $21B (€19.7B), losing $1.8B (€1.7B) in the process, most of which were U.S. Treasury securities.

Simply put, SVB received a massive volume of deposits during the tech boom of 2020-2021 and invested the proceeds into long-term Treasury bonds during this period when interest rates were very low. In light of the increased interest rates, the market value of those Treasuries is substantially lower than the price that SVB paid for them.

In addition, the rate at which clients were burning cash had not slowed down at all as expected, given the current economic climate. It said that deposits had been leaving the bank faster than expected this year. Taking a closer look at it, through decision-making and leveraging, SVB tied up too much of its assets in long-dated Treasuries while not being prepared for the effects of a massive outflow of venture capital in a difficult market for venture capital firms.

A plan was announced by SVB to raise over $2B in the capital in order to compensate for losses and excessive deposit outflows which included the sale of $1.25B of common stock and $500M of convertible preferred stock, in order to cover these losses. It also plans to sell $500M of common stock to General Atlantic, an investment firm, contingent on the closing of the $1.25B offer to the public.

In light of rapid deposit outflows, SVB may try to offer the bank for sale. However, it will be difficult to determine the value of the bank.

What happened To Silicon Valley Bank’s share (SIVB:NYSE)?

Just days earlier, Silvergate Capital Corp announced it was shutting its bank down, spurring a broader selloff in industry stocks.

Following news that SVB needed to raise capital, its shares fell by more than 60% on Thursday, March 9, 2023. Trading was halted Friday after premarket activity plummeted by another 62%. The bank traded for less than $40 in Friday’s premarket session, despite its 52-week high just shy of $600 per share. Currently, the bank has been closed by regulators.

Is the Silicon Valley Bank’s crisis jittering other America's banks?

Not only did SVB Financial plummet by 60% on Thursday, but the financial sector was also the worst performer. It is totally understandable as the word “bank run” and “bank failure” are undoubtedly frightening for investors.

In a positive light, it appears that many of SVB’s problems are company-specific.

It wasn’t particularly wise for SVB to invest so much of its assets in low-interest mortgage securities, which is the only major bank willing to lend money backed by illiquid securities. Nevertheless, other banks that lend to early-stage businesses may take a hit, but most banks should not be affected.

In relation to other major banks on Friday's trading day.

In terms of US banks, JPMorgan Chase lost 2.54%, while Bank of America and Citigroup lost less than 1%. Meanwhile,Deutsche Bank, the German bank dropped 7.35%, Paris, Société Générale lost 4.49%, Crédit Agricole slide 2.48%, BNP Paribas slipped 3.82 %, Barclays, the British bank had a 4.09% dropped and UBS, The Swiss Bank lost 4.53%.

USDC Stablecoin Rebounds to Peg After SVB Exposure

As the issuer of cryptocurrency’s second-largest stablecoin pledges to cover any shortfall in the $3.3 billion of reverses held at collapsed Silicon Valley Bank, the coin started to rebound towards its intended $1 dollar peg.

Circle reiterated its stablecoin, USDC, is backed by $42.1 billion in cash and US Treasury bonds. As of Thursday, outbound transfers of $3.3 billion initiated by Silicon Valley Bank had not settled, but the company expressed confidence in US regulatory efforts.

According to Jeremy Allaire, the CEO of Circle, “…..is also possible that SVB may not return 100% and that any return might take some time”.

Restoring investors’ confidence is crucial now. Christian Catalini, Co-Founder & Chief Strategy Officer of Lightspark, Founder of MIT Cryptoeconomics Lab also highlights Jeremy’s words that “Circle, as required by law under stored-value money transmission regulation, will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary.”

USDC’s volatility, which is supposed to be one of the safest crypto assets with a constant $1 value, spread to stablecoins like Dai and Pax Dollar, which also moved closer to their pegs. On the other hand, Coinbase Global Inc., US-based crypto exchange said it would be “temporarily pausing” the conversion of USDC into US dollars during the weekend and would resume on Monday when banks open.

“The market ‘panic priced’ USDC like it priced USDT around the Luna collapse,” said Haohan Xu, chief executive of Apifiny, an institutional trading platform.

USDC liquidity operations will resume as normal when banks open on Monday morning in the United States. Circle ensures “our teams are well prepared to handle significant volume, built on the strong liquidity and reserve assets”.

As a regulated payment token, USDC will remain redeemable 1 for 1 with the U.S. Dollar.

References :An Update on USDC and Silicon Valley Bank

SVB Fallout Spreads Around World – Ripple effect outside the US

A great deal of fallout is beginning to spread around the world from the collapse of Silicon Valley Bank, which had branches in Canada, China, Denmark, Germany, India, Israel, the United Kingdom, and Sweden

SVB’s unit, which is based in the UK, is reportedly set to be declared insolvent has already ceased trading, and is no longer taking any new customers. According to Bloomberg, Jeremy Hunt, the UK Chancellor, was urged to intervene in the issue on Saturday by the CEOs of roughly 180 high-tech companies in a letter they sent to him

Founders are warning that without the intervention of the government, the bank’s failure will wipe out startups all over the world.

SVB’s joint venture in China, SPD Silicon Valley Bank Co., was trying to calm local clients overnight reassuring them that operations, during this time, have been independent and stable. As of now, SVB’s localized efforts in China do not appear to have been affected by the changes.

According to TechCrunch, more than 60 YC-backed Indian startups have more than $250,000 tucked away in accounts at Silicon Valley Bank and more than two dozen have more than $1 million in their accounts, according to a survey carried out by and among the startups. There have been dozens of young Indian startups backed by companies such as Y Combinator, Accel, Sequoia India, Lightspeed, SoftBank, and Bessemer Venture Partners that have banked with Silicon Valley Ban.

The start-up scramble

SVB had reported banking 44% of 2022’s venture-backed tech and health care IPOs, and 55% in 2021.

“The impact of the SVB incident on the technology industry should not be underestimated,” analysts led by Liu Zhengning at China International Capital Corp. said in a note.

In layman’s terms – the failure of Silicon Valley Bank could be attributed to the fact that it had links to the tech industry, which has been negatively affected by the rising interest rates and the changing preferences of consumers.

Many start-ups have already taken their deposits out.

In order to survive in the tech startup industry, it is essential to have a substantial amount of cash on hand for paying for hefty expenditures such as staff salaries and research and development costs.

Since Silicon Valley Bank has now been shut down, startup founders who have been unable to access their accounts have been getting increasingly worried about what will happen to their investment capital as a result of the closure. As a business, one of the most important concerns is making payroll as well as keeping the business afloat.

As of Friday, According to Roku, the company held a total of 26% of its cash and cash equivalents – about $487 million – as per its filing with the Securities and Exchange Commission (SEC). Meanwhile, Roblox’s filing indicated that SVB held about 5.5% of its $3 billion cash and securities balance as of February 28, 2023.

This crisis will start on Monday and so it is important to start preventing it from now.

There are some in the VC and startup world who are trying to come up with temporary fixes.

They are launching emergency funding programs to help companies meet payroll and other obligations, as well as longer-term bridge loans to help companies meet working capital needs.

For instance, Ben Kaufman, former CMO at BuzzFeed and the founder of experiential toy store Camp, sent out an email offering customers 40% off, “You can use the code BANKRUN at checkout” encouraging them to shop so the co could keep up its operations.

In his email, he wrote, “Unfortunately, we had most of our company’s cash assets at a bank that just collapsed. I’m sure you’ve heard the news. We are hopeful that this will be resolved soon, but in the meantime we are turning to you, our most valuable customers, to help us.”

“Everyone is affected” Zach Tratar, Founder of Embra tweeted on the issue.

So far I know, due to SVB:
- Startups who have their merger/acquisition delayed.
- Startups who can't access 95% of their capital. Will likely miss payroll.
- Startups who are entering fundraising and likely pausing. They're uncertain.

Everyone is affected.
— Zach Tratar (@zachtratar) March 10, 2023

FDIC, which has transferred all of SVB’s deposits to a new bank, has said that “all insured depositors will have full access to their insured deposits no later than Monday morning.” However, Deposits are only insured up to $250,000. Consequently, companies with accounts that exceed $250,000 must contact the FDIC hotline. Vimeo, for instance, said it had an account balance with SVB of less than $250,000, meaning it will be insured by the Federal Deposit Insurance Corporation (FDIC).

Long-run impact on start ups.

SVB startups are experiencing a decline in contract renewals from existing customers and prospects who are delaying signing new contracts with new startups due to this.

Among the firms that have benefitted from SVB investment money are Sequoia Capital, Accel, Kleiner Perkins, Ribbit Capital, Spark Capital, and Greylock. A total of 56% of the bank’s loans were made to venture capital firms and private equity firms as of last year.

It is still unclear how this will affect venture capital firms.

“The risks of bankruptcy should not be excluded.” – Liu Zhengning highlighted.

SVB rivals benefit from startups seeking new homes for funds

Since my DMs + emails are going a little crazy and I can't give the same level of personal service as I normally do.

If you want to get a Mercury bank account quickly please use this link and we will try to prioritize. Though normal signups is also fast! https://t.co/wNW2UGA2Hb
— immad (@immad) March 9, 2023

“We have onboarding and support teams working all weekend to make sure we can get our new signups approved”, tweeted Immad Akhund, CEO of Mercury.

According to Pedro Franceschi, the CEO of Brex. They are currently offering an emergency bridge credit line for SVB customers to meet their operational spending needs. Additionally, Brex is currently working round the clock this weekend to assist founders to find solutions to this significant issue they are facing.

References: How Brex is supporting SVB customers

Bottom Line

An early-stage start-up may struggle to cope with the loss of funds that can result from a bank failure, as losing access to funds can be overwhelming.

Ultimately, only large competitors will profit from this scenario because they can prey on these startups and then buy them for pennies on the dollar.

Moving forward, it is advisable for all startups to have accounts at two different banks. One account should be with a large institution like JPMorgan Chase & Co. or Bank of America, and another with a startup-focused bank like First Republic or Mercury.

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