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When Punit Singh Soni founded Suki in 2017, Silicon Valley Bank seemed like the natural place to put his company’s money. Many other tech companies were clients, and the bank was viewed in many ways as the “default” for startups to use, Soni said.
“To be honest, when you’re an entrepreneur, you don’t want to be thinking about banking. You want it to work,” he said. “And I think that there are very few places who understand entrepreneurs the way SVB does.”
Little did he know that roughly five years later, that “default” bank would collapse and be taken over by state and federal regulators. That’s been the shocking reality many in the local tech industry have dealt with over the past week, after a bank run prompted the country’s 16th largest bank to become insolvent. It was the second largest bank failure in U.S. history.
On Friday, March 10, government regulators stepped in to take control of the bank and told customers that they could get their access on Monday to their deposits up to the $250,000 cap that the Federal Deposit Insurance Corporation (FDIC) insures.
What wasn’t clear until Sunday, when the FDIC announced that it would guarantee the full amount of all deposits, is what would happen to all the money over the quarter million dollar limit.
Over the past few years, Suki — an artificial intelligence company based in Redwood City that’s created a voice assistant for doctors — has raised roughly $100 million and used Silicon Valley Bank for its main operating account, Soni said. He opted to work with one bank because of the simplicity it provided.
“Who goes through a bank run, ever? Those are the things you read about in books,” Soni said.
Soni wasn’t the only one left scrambling in the days following the bank’s collapse.
On Monday, Wilbur Properties, a real estate and property management company that manages more than 200 Bay Area properties, including tech sites, sent out a letter to its tenants notifying them that all online payments via Silicon Valley Bank were on hold until Wilbur Properties could set up accounts with a new bank. Wilbur Properties was unavailable for comment for this article.
Garry Tan, CEO and president of of Y Combinator — a Mountain View-based accelerator for tech startups that has been used to launch more than 4,000 companies, including Airbnb, DoorDash, Reddit and Instacart — circulated a petition on Twitter the day after the collapse, asking the government to intervene swiftly to save startups whose sole bank accounts, like Suki’s, were with SVB.
In the Y Combinator community, “one-third of startups with exposure to SVB, used the bank as their sole bank account,” Tan tweeted. He estimated that more than 10,000 small businesses and startups could be at risk of payroll-related furloughs or shutdown, which would affect more than 100,000 jobs.
“The real victims of the SVB fallout are the depositors: startups (10 to 100 employees) who cannot make payroll, and will have to shut down or furlough next week,” he tweeted prior to the FDIC’s announcement that it would guarantee the full amount of all deposits. “If these startups wait weeks/months for their deposits, we have destroyed a generation of US startups, at random.”
The real victims of the SVB fallout are the depositors:
startups (10 to 100 employees) who cannot make payroll, and will have to shut down or furlough *next week*If these startups wait weeks/months for their deposits, we have destroyed a generation of US startups, *at random* https://t.co/mLRQzag1VI
— Garry Tan ??? (@garrytan) March 10, 2023
Tan wrote in Y Combinator’s petition that these companies wouldn’t have the money to pay their employees in the next month.
“Silicon Valley Bank’s failure has a real risk of systemic contagion. Its collapse has already instilled fear among founders and management teams to look for safer havens for their remaining cash, which can trigger a bank run on every other smaller bank,” he tweeted.
Soni said when the bank collapse first happened, his top priority was to make sure that his company could make payroll on time. As investors started to urge companies to take their money out of the bank in the days leading up to the bank failure, Soni said he felt they were “seeding panic” and that he tried not to overreact, opting to leave Suki’s money at Silicon Valley Bank.
The problem was that the panic created a situation in which those who stayed calm and left their money in the bank ended up getting put in a tougher spot, Soni said.
Through a combination of his own funds and money that investors put up, Soni said that the company got a plan in place to make sure employees got paid.
“I can’t tell you with a straight face that that was just easy,” Soni said. “Those two days were pretty nerve wracking.”
Reflecting on the crisis, Soni said that he believes that, while this was a failure of Silicon Valley Bank’s executives, he also feels that Silicon Valley leaders failed to keep calm and communicate clearly. Instead, the panic created a situation in which depositors raced to pull out their money, precipitating the collapse.
“I feel this was a classic moment where we should have shown more leadership,” Soni said. “First of all, we should trust the government. They will do the right thing.”
Soni noted that the government has an incentive to ensure confidence in the banking system. Throughout the last week, he felt it would be a matter of when, not if, Suki would be able to access its funds.
To protect itself in the future, Suki is looking at how to diversify its finances through use of multiple banks, Soni said. But as of Tuesday, its funds remained at Silicon Valley Bank, and Soni said he was considering continuing to use the bank.
Angela Hey, a Portola Valley technology consultant, said that any institution that uses a bank should be wise to the risks.
“People are jolly lucky that the government is bailing people out, as it would be more catastrophic otherwise,” Hey said. “There will be ripples from the loss of SVB stock for those who held it.
“It is a lesson for businesses to diversify their holdings, particularly small businesses. Any business, nonprofit, church, school or other institution with more than $250,000 in any bank would do well to split their holdings to ensure they are covered by FDIC insurance if there is a run on their bank,” she said. “As we can see, this can happen very quickly and assets can vanish in an instant if even as much as a rumor of bank instability goes viral. A malevolent tweet, blog or video has the power to destabilize trust in a financial institution.”
SVB executives must be held accountable. SVB chief executive Greg Becker sold $3.6 million worth of shares on February 27. He had to have known of the pending disaster. Earlier, Becker tried to get regulations weakened.
Currently, Becker is vacationing in Hawaii. The regulators must’ve been on vacation, too… If found guilty, executives like Greg Becker must do prison time. Serious prison time.
“Fed was aware of Silicon Valley Bank problems more than a year before its collapse” – https://6abc.com/fed-was-aware-of-silicon-valley-bank-problems-more-than-a-year-befo/12982253/
“In all, the Fed cautioned the bank about its concerns on several occasions, ABC News confirmed.
In a 2021 review, the Fed identified significant vulnerabilities in the bank’s containment of risk, but the bank did not rectify the weaknesses.”
“Former Silicon Valley Bank CEO Greg Becker sat on the board of directors at the Federal Reserve Bank of San Francisco from January 2019 until the day of the bank’s collapse on March 10.”
Same old, same old.
“Inside the Collapse of Silicon Valley Bank – While its leader extolled innovation and the future of tech, the bank paid less attention to risk management and was caught flat-footed by economic change.” – https://www.nytimes.com/2023/03/14/business/silicon-valley-bank-gregory-becker.html
“The tale of Silicon Valley Bank is one of ambition and management mistakes, of a chief executive who talked so much about innovation and the future that he and his lieutenants didn’t pay enough attention to the mundane but enormously important work of managing risk and ensuring financial prudence.”
Obviously, collapse of any bank has dire consequences on those who lose $$$ as a result. The Fed / taxpayers are stepping in to protect depositers in this case. Keep in mind that those monies could have been used on some other useful project, such as paying for more affordable housing in Mountain View.
As long as no significant reforms are made in this area, banks are going to continue to press for deregulation for the simple reason that THEY MAKE MORE MONEY THAT WAY. If they win their bets, THEY KEEP THE WINNINGS. If they lose their bets, they get bailed out by Uncle Sam. This is only an acceptable solution for the investor class. This situation is going to keep happening until the public cries out for it to stop.
Local reporting seems oddly quiet on this.
Reporting from the NYT about Gerry Tan’s activities to shape public opinion on SVB’s failure – https://www.nytimes.com/2023/03/13/technology/silicon-valley-image.html .
“Some tried to combat the anti-tech perception that was bubbling up on social media. Over the weekend, Garry Tan, the president of the start-up incubator Y Combinator, sent a message to hundreds of founders and entrepreneurs telling them to begin posting “tweetstorms” to humanize the impact that Silicon Valley Bank’s failure was having on them.
The idea was to show how innovation could be stifled if depositors were not made whole, with the added benefit that more of those types of narratives would prevent some of the more outspoken “tech bro” venture capitalists and founders from becoming Silicon Valley’s faces of the situation.
“By coming together as a community and showing our strength, we can have an impact on the future of start-ups,” Mr. Tan wrote in the letter, which was obtained by The New York Times. He later posted an online petition to the government asking them “to save innovation in the American economy,” which was signed by more than 5,000 chief executives representing nearly half a million employees.”
From the NYT: “The Fed’s Unpleasant Choice” – https://www.nytimes.com/2023/03/22/briefing/fed-banking-interest-rates.html
“The Federal Reserve faces a difficult decision at its meeting that ends this afternoon: Should Fed officials raise interest rates in response to worrisome recent inflation data — and accept the risk of causing further problems for banks? Or should officials pause their rate increases — and accept the risk that inflation will remain high?
This dilemma is another reminder of the broad economic damage that banking crises cause. In today’s newsletter, I’ll first explain the Fed’s tough call and then look at one of the lessons emerging from the current banking turmoil. Above all, that turmoil is a reminder of the high costs of ineffective bank regulation, which has been a recurring problem in the U.S.”
snip
“The banking troubles of the past two weeks scrambled these plans. Why? In addition to slowing the economy, higher interest rates depress the value of many financial assets (as these charts explain). Some bank executives did a poor job planning for these asset declines, and their balance sheets suffered. When customers became worried that the banks would no longer have enough money to return their deposits, a classic bank run ensued. It led to the collapse of Silicon Valley Bank and Signature Bank, and others remain in jeopardy.
If Fed officials continue raising their benchmark rate, they risk damaging the balance sheets of more banks and causing new bank runs.”
Related: “A Big Question for the Fed: What Went Wrong With Bank Oversight?” – https://www.nytimes.com/2023/03/21/business/economy/silicon-valley-bank-fed-oversight.html
“Many of the bank’s weaknesses seem, in hindsight, as if they should have been obvious to its regulators at the Fed. An outsize share of its deposits were over the $250,000 insurance limit, making depositors more likely to flee at the first sign of trouble and leaving the bank susceptible to runs.”