What Next For Startups With Deposits Stuck In Silicon Valley Bank?

In the wake of the collapse of Silicon Valley Bank (SVB), founders of startups, which have headquarters or operations in the US, are now looking for ways to recover their deposits from the collapsed bank.

According to an official release by the Federal Deposit Insurance Corporation (FDIC), all insured depositors will have full access to their insured deposits by Monday, March 13.

The FDIC insures deposits of up to $250K. The startups affected by the closure of the bank can file their claims at FDIC’s portal.

While the FDIC has said that all insured depositors will have access to their insured claims by Monday, filing a claim at the link may help startups expedite the process.

Following the shutdown, startups across the world have been worried about their funds which are parked with the bank.

Speaking with Inc42, Anil Advani of Inventus Law said, “There is no specific timeline. We expect FDIC to find a way wherein the customers of SVB are the least impacted. While the step-by-step process may take longer, the FDIC may allow people to withdraw in tranches from the bank based on their historical withdrawal cycles.”

How SVB Became Startup Darling?

In the past couple of years, Silicon Valley Bank has emerged popular bank among startups worldwide looking to expand to the US, due to its long list of services and startup-friendly policies. It provided services such as banking solutions for private equity funds and venture capital funds, which allowed them to facilitate the movement of their investments in startups easily.

Major startup investors such as General Atlantic and Y Combinator worked with SVB. A majority of Y Combinator-backed startups have an account with SVB, making the early-stage investor’s exposure in the bank all the more significant.

Further, SVB significantly reduced compliance for startups; one did not require a Social Security Number to open an account with SVB, something not many US-based banks offer.

SVB also provided stage-wise banking solutions. For instance, it provided free checking and payment services to early-stage startups, while it offered global payments, forex and venture debt to growth-stage startups. 

The bank also offered treasury and capital management solutions for late-stage startups, covering the entire spectrum of the startup ecosystems with its services. Besides, mainstream corporate banking solutions such as business credit cards and debt lines for working capital requirements.

Reduced compliance, coupled with the ease of setting up a US bank account, saw SVB become a favourite of startups, especially those looking to set up shop in the US.

SVB also invested in startups from across the globe, including India, from its venture arms in the past. Over the years, it has backed Indian startups like BlueStone, Paytm, Naaptol and Shaadi.com, among others. However, the status of these investments is currently unknown. 

Related Read: Indian Startups & The Silicon Valley Bank Brouhaha

SVB Collapse Jolts Startup Ecosystems Globally

With so many startups connected with SVB, it was no surprise that the news of the bank’s collapse created panic within startup ecosystems across the globe.

In a tweet, Zoho founder Sridhar Vembu said that SVB’s collapse showed that the ‘bubble-fueled prosperity’ within the startup ecosystem can disappear overnight, adding that startups must build to be resilient.

On the other hand, Y Combinator president and CEO Garry Tan called it an extinction-level event for tech startups.

Tan also added in a series of tweets that 30% of the YC-backed startups exposed through SVB can’t make payroll in the next 30 days, which could result in salaries getting delayed for thousands of startup employees across the world.

Among the Indian startups, the initial impact of SVB’s collapse is expected to be felt by those headquartered in the US. However, most startups park their money across different banks and hence, the impact is likely to be limited.

According to Shashank Randev, founder VC at 100x.VC, late-stage VCs might feel some heat as their institutional investors or LPs might be from the US. However, the impact on early to growth-stage startups is expected to remain minimal.

Further, SVB has nearly $175.4 Bn in deposits and the bank is likely to be taken over by some major financial institution, which should provide a sigh of relief to startups.

Related Read: Silicon Valley Bank Collapses – Shatters The Valley Dream For Indian Startups?

How Social Media Panic Grounded A Bank In 48 Hours

The panic caused on social media due to SVB’s move to sell substantially all of its Available for Sale (AFS) securities portfolio worth $21 Bn at a loss of $1.8 Bn was one of the reasons behind the rapid fall of SVB.

According to SVB CEO Greg Becker, the securities were sold to reinvest the proceeds and raise approximately $2.25 Bn. PE major General Atlantic also committed to investing another $500 Mn.

However, the news of this sale resulted in investors dumping SVB shares on Thursday (March 9), with the bank’s stock plummeting 60.41%. The sharp downfall continued on Friday, with the stock falling 66% in pre-market trading hours. At the same time, hundreds of customers of SVB started withdrawing their funds from the bank.

Subsequently, the California Department of Financial Protection and Innovation was forced to step in to prevent a bank run, and the federal agency first closed SVB’s share trade and then the bank itself.

With the situation changing almost every minute, there was also a lot of misinformation on social media platforms. The posts with incomplete information about the chain of events at the bank also played their part in adding to the customers’ anxiety.

Many threads on Twitter also linked the collapse to SVB’s commitment to carbon neutrality, diversity, equity and inclusion initiatives in the US, which had no bearing on the developments over the last 48 hours or so.

Many equally bizarre tweets have been making the rounds on social media, stoking confusion and panic within the industry.

Besides, reports also suggested that Silicon Valley Bank had no official chief risk officer for the past eight months, with the previous CRO Laura Izurieta stepping down from her role as CRO of SVB Financial Group in April 2022. 

Given the slowdown in the venture capital market over the past 15 months or so, this was a strange move from SVB.

What’s Next For Silicon Valley Bank?

According to sources, the likes of Goldman Sachs and BlackRock are looking at acquiring SVB owing to its strong asset book. It is prudent to mention that SVB has assets worth $209 Bn, making it one of the largest US banks.

For now, the Bank of England also intends to place Silicon Valley Bank UK under insolvency, according to an official release. 

“We are announcing that following conversations with the Prudential Regulatory Authority there is an intention, barring any intervention, to put Silicon Valley Bank UK Limited into insolvency from Sunday evening,” the release said.

While the opinion is divided on what exactly triggered the collapse of SVB, it would likely take a few months for the exact details to be out. Amidst all this, the global startup ecosystem remains on tenterhooks due to the uncertainty of this collapse.