In a sector well used to hype, rumour, and the effects of both on the fortunes of companies large and small, Silicon Valley Bank's rapid and unexpected collapse has rocked an already fragile tech startup and funding landscape.
Headlines that focus on the fallout for big tech firms who were SVB customers often underreport the massive financial strain that startups face with the news.
While as of Monday morning, it looks like relief may be in sight following rapid responses from the US and UK governments, early-stage founders in Scotland are sharing the real impact of the collapse and their perception that VCs, particularly in the US, are trying to run damage control.
The TL;DR of what happened?
The story started making mainstream news after SVB announced plans to raise $2.25bn to cover for an $1.8bn loss after they sold securities (mostly US treasuring bonds) that had lost significant value since the Fed raised interest rates, reducing the value of T bonds. This spooked folks who worried about a bank-run, so moved to pull out their cash, which caused a bank-run. If you'd like more info about what happened, go here. For a deeper dive, go here.
While it's too early to be conclusive about any additional contributing factors or activities at the bank, SVB's CEO Greg Becker advocated for weakening regulations that could have helped the bank avoid its troubled state, arguing that “SVB’s deep understanding of the markets it serves, our strong risk management practices." Two weeks before SVB announced it needed to plug the $1.8bn gap, Becker sold $3.6m of SVB stock.
The 16th largest bank in the US predominantly served two types of customers for the last 40 years: funds and tech companies. Because of partnerships and endorsements from accelerators like Y Combinator and Techstars they were also very successful in banking many early stage companies in the US and UK.
After the announcement on Wednesday, March 8th, the rumour mill heated up among startup founder communities, driven by advice from investors to move their cash out of an abundance of caution.
On Thursday, things escalated. While behind the scenes investors were advising their founders to transfer money as fast as possible, publicly some were putting out statements trying to calm the wider startup space. Everything's fine, but move your money, but don't feed into the hysteria and cause a bank run.
Statements from Greg Becker asking for calm were of no help, neither were statements of support from accelerators like Techstars, who sent an email to their founders reaffirming that they "remain supportive of SVB" and offered direct access to SVB's Head of Startup Banking to put anyone at ease.
On Friday, the bank collapsed. After the collapse of the US bank, the UK subsidiary put out a statement of reassurance about their fiscal independence. Hours later the UK entity was placed in a Bank Insolvency Procedure by the Bank of England.
The founder reaction
Founders WhatsApp and Slack groups quickly erupted with concern that their businesses could be at risk, either as an SVB customer, or due to a fear that there might be similar problems with other business banks. There was also frustration about the hypocrisy of how larger VC firms were rushing to try and support the bank post-failure.
After the widespread attempt to convince founders that SVB was safe had failed, several VC's put out a statement of support, aimed at building confidence for possible purchasers of the bank. One founder compared it to the tone-deaf celebrity Imagine video released during COVID.
"The only pledge I want to hear from VCs is about how they are going to loan cash to affected portfolio companies on good terms. Not an empty pledge to a company that clearly knew what was going wrong a month ago and made sure they cashed out their equity before it all went wrong,” one founder posted.
Neil Farish, CEO at Scotland-based Relaymed who banked with SVB said, "Our income is all in USD from US clients, so [the] majority of our funds [are] there. We have no access to funds, so payroll [is] our biggest issue."
Farish has been working throughout the weekend to work up a plan and is looking to open a new bank account as soon as possible on Monday, "Feeling pissed off, but determined this won’t stop us."
Danae Shell, CEO and Cofounder of Valla managed to remove her company’s funds in time, “I withdrew our cash immediately and luckily the transfer went through. I feel awful for the companies - and their employees - that got caught up in this.”
Martin Ewart, Co-founder and Managing director at Earthwave used to work in Interest Rate Risk IT in the lead up to the 2008 crisis before starting his own company, and summed up what's going through founders' minds:
"The main problem is the uncertainty that we are now faced with. Should money be in challenger banks? Or go with the traditional banks? How will it impact investment decisions? Will this make funding even harder to obtain? If many people now pull their money out of smaller banks, will we witness more collapses? What about large banks implicated with SVB? With this backdrop, we have to still make decisions about our businesses."
The rumour mill kept spinning late Friday and into Saturday with founders saying that investors and professional services were suggesting they think about removing their funds from neo/challenger banks and quickly open traditional bank accounts. Others were making recommendations to transfer funds into non FDIC or FSCS protected accounts.
After receiving advice from a VC to use a well-known global financial payment tool to hold their money, one founder wrote "Don’t tell people where to park their money and especially don’t tell them to park it in a non FSCS protected instrument."
Uninformed advice based on rumour is the very thing that encourages bank-runs. SVB wasn't a challenger bank; it's as traditional as they come. Some neobanks are fully-fledged banks (like Starling, Monzo, and Atom Bank), while others are payment processing e-money institutions services (like Revolut, Wise, and Tide). Some publish their risk management frameworks and reports (here's Starling's and Monzo's 2022 Pillar 3 disclosures respectively) and some don't.
Regardless, the situation at SVB shows how much risk there is when rumours catch fire, and especially when the community of customers is relatively connected.
Understanding the risk of traditional banks
Startup founders are rushing to try and understand the underpinnings of what happened with SVB and the risk of reliance on traditional banking.
Colin Hewitt, founder of fintech Float believes that more education is needed for businesses about treasury risk management:
"The first time we raised £1.5m, we had no idea what to do with it. Our current bank RBS has already had a bail out. Should we invest in bonds? Consider higher interest rates with smaller banks? How many bank accounts should we open? In normal times these conversations seem a little paranoid, but in times like this they seem perfectly reasonable."
Cryptocurrency enthusiasts who have long advocated for DeFi solutions have had a challenging year of exchange and DeFi failures, but Hewitt asks if cryptocurrency needs to be in the conversation, "The current perception is that options like Bitcoin are too risky. But should there be an allocation for these kinds of assets that could well become a safe haven in times when the banking system looks weak?"
In the crypto space, stablecoin USD Coin dropped in value after it disclosed some of its reserves were held at SVB. The fact that trust in a traditional bank led to this devaluation was an irony not lost on many who advocate for cryptocurrencies.
Rather than encouraging more risky behaviour by relying on bail-outs, Hewitt is clear that more long-term thinking is needed by the government to think of a better solution for businesses when it comes to FSCS protection, as the £85k per account protection is "simply not going to cut it for businesses that won’t even make one month's payroll [in many cases even for] early startups."
What are the options?
There's sometimes a fine line between being paranoid and prudent however this is still very much a developing situation, and the best advice for founders is to be vigilant of fake news or take rumour as if it was gospel.
In the US, rumours have continued to swirl about what happens next. While the hopes of another bank stepping into rescue account holders, on Sunday morning, US Treasury Secretary Janet Yellen said there won't be a government bail-out but that they are "concerned about depositors, and we’re focused on trying to meet their needs."
By Sunday evening, following the shutting down of Signature Bank, which was a major lender in the crypto space, the FDIC, Federal Reserve, and the US Treasury Department released a joint statement announcing that “depositors will have access to all of their money starting Monday, March 13,” no doubt a massive sigh of relief for the funds and companies who had been rushing to access alternative working capital throughout the weekend.
In a statement from The UK Treasury, the government is "working on a solution" and will "bring forward immediate plans to ensure the short term operational and cashflow needs of Silicon Valley Bank UK customers are able to be met."
By early Monday morning there had been reports of at least one rescue offer bid made by clearing bank The Bank of London and a group of private equity firms, as well as a UAE firm, Royal. HSBC has agreed to take over SVB's UK unit in reports on Monday morning.
While on both sides of the Atlantic there are hopes of some kind of government-assistance for vulnerable companies and positive statements, until we see depositors able to access their money, there is no legal guarantee of recouping any amount above the insured amount (£85k in GBP accounts and $250k in USD accounts), and the process and timeframe for accessing whatever funds are in those accounts remains unclear.
We don't yet know the wider fallout of SVB and probably won't know for some time to come. It's an uncertain and uncomfortable situation that only adds to the challenges that startup founders face on a daily basis. Relaymed "worked hard to be in a good cash position, now we need to [figure it out] again. [Our] main concern is keeping everyone in our great team," Farish said.
Martin Ewart is hunkering down for what's next, "We appear to be in for an increasingly uncertain time and it appears that even those of us not directly impacted by SVB are likely to feel some impact ahead."
If you've been affected by the SVB collapse, and would like to share your experience, please email firstname.lastname@example.org. For resources available to UK startups, Mountainside Ventures has a running list for those impacted by SVB's collapse.
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