Everything you need to get caught up on the SVB crisis

On Friday, the Federal Deposit Insurance Corporation announced that it had taken over Silicon Valley Bank, and as we rushed to plan coverage, one of my colleagues succinctly described the situation: “This is historic shit.”

A week later, we can all agree they were right. But a lot has happened, and unless it’s your job to edit the news, it’s possible you missed a slice of the saga, if not the entire story.

Here’s what went down:

How it started

The drama kicked into high gear in the middle of last week: SVB’s shares fell over 60% on Wednesday evening, when the bank said that it planned to sell shares to raise capital after taking a $1.8 billion charge from the sale of some assets. The bank also indicated that it would boost its borrowing, reinvest capital into higher yielding assets and take on more funding from an external entity.

Given the recent failure of crypto bank Silvergate and SVB’s own troubles due to its exposure to the venture capital and startup ecosystem (which hasn’t been doing well), investors understandably got jittery and started selling SVB stock.

Famously, on Thursday evening, SVB CEO Greg Becker said on a call with customers that the bank had “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”

The executive asked VC clients to “stay calm.” He said, “That’s my ask. We’ve been there for 40 years, supporting you, supporting the portfolio companies, supporting venture capitalists.”

We all know how that went.

Around the same time, several sources told TechCrunch+ that VCs were advising their portfolio companies to pull their money out of SVB, fearing a bank run.

In case you aren’t too familiar with how banks can quickly fail thanks to a loss of depositor confidence, here’s how Alex and Natasha explained it in the case of SVB:

A number of investors fear a bank turn — meaning that enough startups will withdraw their capital at SVB, a situation in which the financial institution could wind up upside-down in terms of deposits versus demand for those funds. (Bank runs are often ironic in that they can become self-fulfilling prophecies.)

One investor even told TechCrunch that many VCs are advising startups to decentralize their assets across multiple banks and generally keep no more than $250,000 in SVB checking accounts. (NB: $250,000 is the maximum that is insured by the FDIC, meaning that those funds would have solid external protection.)

SVB’s stock started Friday in the basement as fears of a bank run congealed into reality. Trading of the bank’s shares was halted, reportedly because SVB was frantically trying to sell its assets so it wouldn’t shut down.

SVB also asked its employees to work from home until it figured out the next steps.

What really happened?

To better understand how things had played out, Alex dove deep into what led to the bank going from a relatively stable business to a going concern risk in just five days:

  • The COVID-19 venture boom was partially predicated on money being incredibly cheap: Global interest rates were low to negative, so there were few places to put capital to work. This led to larger venture capital funds investing mountains of money into startups, which deposited said money into SVB, as it was, until recently, the premier destination for startups’ banking needs.
  • However, as the FT notes, the massive rise in deposits at SVB — never a bad thing at a bank — eclipsed the bank’s ability to loan capital. This meant it had a lot of cash lying around at a time when holding cash was useless for seeing returns.
  • The bank invested all that money, at low rates, into things like U.S. Treasuries (page 6 of its mid-March update presentation).
  • Later, in an effort to quell inflation, the U.S. Federal Reserve raised interest rates, venture capital investment slowed and the value of low-yield assets fell as the cost of money rose (bond yield trades inversely to price, so as rates went up, the value of SVB-held assets went down).
  • The bank decided to sell its available-for-sale (AFS) portfolio at a loss (rates up, value down) so that it could reinvest that capital into higher-yielding assets. SVB wrote to investors that it was “taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.”
  • What did SVB expect after all was said and done? An estimated $450 million boost to its annualized net interest income (NII).
  • Initially, TechCrunch+ thought that the bank’s shares were selling off due to investors being unhappy with the $1.8 billion charge it suffered when selling its AFS portfolio, as well as SVB’s plan to sell a few billion shares, which would dilute existing shareholder ownership.
  • Instead, the venture and startup market fretted. Why was SVB selling so much stock? Taking such a huge charge? Making such drastic moves? Concern led to fear, which led to panic. Basically everyone was worried that everyone else would panic and take out their capital, so they wanted to do it first. Any risk of capital loss was unacceptable, so folks raced to not be last.
  • It later became clear that SVB had greater unrealized losses on its balance sheet compared to peers, which formed a crack in its foundation that would ultimately crater the bank when it attempted to spackle over the matter with the actions it took prior to the bank run.

We were gobsmacked at SVB’s rapid demise: “Why did the bank go from saying it was well capitalized yesterday to what appears to be a fire sale so soon? Our guess at this point, pending other information, is that the panic over the bank’s health led to such an outflow of deposits that it actually did get into trouble. Banking depends on trust, and suddenly SVB didn’t have the market’s.”

A couple of hours later, the other shoe dropped: The FDIC announced that it had taken over SVB, that the bank had failed and it would resume operations on Monday, March 13, with regulators in charge.

“Of the many moves that FDIC is making, the top priority appears to be giving customers access to their deposits,” Natasha wrote. “The same memo says that all insured depositors will have ‘full access’ to insured deposits no later than Monday morning, March 13, and that official checks ‘will continue to clear.’ Uninsured depositors will get paid an advanced dividend within the next week, the memo says, and future dividends could be made as FDIC sells assets of SVB.”

The news that SVB had failed, becoming the second-largest U.S. bank to do so, ruined the weekend for many startup founders and venture capitalists. How were startups going to pay for stuff while the mess was being sorted out?

It’s important to remember that at this time, no one actually knew how things would play out. Startups and investors had little visibility into the FDIC’s plans for SVB, and there was no telling how long companies with funds locked up at the bank would have to go without cash.

Alex explored what was at stake:

A good number of startups have been sitting on huge sums of money raised late in the last startup boom. They were depending on that money to get them through the current downturn. What happens to those companies if they banked at SVB and don’t have that capital available to them? The later stage the startup, the greater its cash needs likely are, and the harder they will be to bridge with straight-up cash.

Some of these cash-rich unicorns are also very upside-down when it comes to their valuations. Precisely who is going to offer them cash at a price on par with their prior round? Probably no one.

It’s a mess right now. This crisis is going to kill a host of startups, either quickly or by simply adding enough operational friction to bring them to their knees.

The (un)stablecoin situation

As if the crypto industry already hadn’t had a bad enough week with Silvergate Bank shutting down, on Friday it became known that one stablecoin in particular, USDC, had held some of its backing capital at SVB, funds that were likely now illiquid for several days at least. USDC is the second-largest stablecoin by market capitalization.

USDC’s issuer, Circle, said the next day that “3.3 billion of the ~$40 billion of USDC reserves remain at SVB,” or about a third of the cash the company said it held in January. Following that announcement, USDC depegged from its $1 target to trade as low as 88 cents.

Meanwhile, Signature Bank, a significant lender for the crypto ecosystem, became the second casualty of the banking crisis on Monday when regulators shuttered the bank, saying “it had caused a systemic risk and could threaten the U.S. banking system.” Around 30% of the bank’s deposits came from the crypto industry.

“Signature Bank’s closure serves as a one-two punch as worries mount over the vulnerability of any bank with exposure to the crypto industry,” Francesco Melpignano, CEO of Kadena Eco, told TechCrunch+. “With only a small number of publicly traded banks having ties to the crypto space, many investors are scrambling to place bets against them.”

However, USDC recovered to its $1 target on Monday when the FDIC and the Federal Reserve announced that SVB and Signature depositors would be made whole again.

If USDC collapsed, it would have had “severe consequences on the whole crypto ecosystem, for instance by causing cascades of liquidations in DeFi lending protocols,” Pietro Saggese, a postdoctoral scientist at the Austrian Institute of Technology, told TechCrunch+. “However, on the other side, USDC is now being traded at par with the U.S. dollar, a good signal that the market might have recovered after this shock.”

Who bore the brunt

For the people most affected by SVB’s failure — startup founders and their employees — this was a tough, confusing and sometimes panicky couple of days.

Some founders read the writing on the wall and pulled their money out of the bank, while others anxiously spent the weekend unable to access their account or reach the bank. Still others managed to wire some of their money out, scrambling to set up new bank accounts elsewhere.

For some founders, though, the bank’s failure made a difficult situation even harder.

“We were actually revising our business model to raise a micro venture fund; this takes that shit off the table for us,” said James Oliver, the founder of the Atlanta-based networking app Kabila. “We still have to raise half a million dollars. It’s already hard enough as it is as a founder, 10x harder as a Black founder. But now, does that mean I can’t even go raise money? I don’t understand what all this shit means.”

SVB was becoming somewhat of a leader in helping Black founders. It connected them with other founders and investors and provided banking services to help scale their businesses, granting opportunities where other banks shied away. The Black community has a fraught history with banking institutions, and SVB emerged as a bank they could trust, Dominic reported.

Many Black founders are now having a larger conversation about where to store funds, such as with a Black-owned bank. The trust between the mainstream banking world and Black founders has been shattered, and that’s important when looking at the distressed history of the Black community and banks, said Harold Hughes, founder of Bandwagon.

“We all know the issues that exist in the banking system for Black people,” he said. “Trust is a hard thing to earn.”

For now, Black founders and investors are taking this as a lesson. Ciara May, the founder of the hair care company Rebundle, said she is open to staying at SVB if its current issues are resolved.

Brian Brackeen, the co-founder of Lightship Capital, also said he would be willing to return to the bank one day, but with reservations. “As far as my banking or keeping millions in an account, my new position in life is to keep millions of dollars in an account with a bank that has trillions of dollars,” he said.

The venture debt question

While founders and VCs took the brunt of the impact, the debacle also affected a service that startups use quite often: venture debt.

SVB has long been considered a leader in venture debt.

Depending on whom you ask, SVB’s downfall is either a good thing or very bad for venture debt. Some felt it would prove to be a windfall, opening up the avenue for new entrants, while others felt it would drive up the cost of raising venture debt as private players offer less favorable terms than banks.

“This is just getting started,” said Zack Ellison, the founder and CIO at A.R.I Venture Debt Opportunities Fund. “It’s going to be very painful and drive up the costs of funding. Debt will become much more expensive. Every financier sees what’s going on and there is a lot more demand for capital than supply.”

But not all players will be pulling back, and nonbanking lenders — many of whom are flush with cash — are in a great position to capitalize on the gap SVB leaves. Private lenders that have traditionally focused on venture debt, including Hercules, Western Technology Investment and Runway Growth Capital, may see a flurry of opportunity.

“Our phones have been ringing off the hook from Hercules to Runway to HPS to say that they are open for business … they are wide open for business, and they want to lean in,” said John Markell, a managing partner at Armentum Partners, which helps companies raise venture debt.

A character test for VCs

While SVB’s failure tested founders’ grit and flexibility, it also turned out to be a test of character for VCs.

Some investors couldn’t do much to help their portfolio companies since they lacked deep personal pockets. A few of those that do have that kind of capital, however, led the cavalry: Two of tech’s biggest entrepreneurs, OpenAI CEO Sam Altman and venture capitalist Vinod Khosla, offered personal funds to startups whose money remained locked up at Silicon Valley Bank.

Altman and Khosla both took to Twitter to urge other venture capitalists to offer emergency cash to founders. “Today is a good day to offer emergency cash to your startups that need it for payroll or whatever. no docs, no terms, just send money,” Altman tweeted, while Khosla said that large VC firms should step up, “especially those taking home millions in fees.”

General Catalyst‘s Hemant Taneja was also helping portfolio companies make payroll with what he described on Twitter as “very low interest loans.”

What’s next? (Maybe)

By Monday afternoon, things were starting to settle (though investors in First Republic Bank wouldn’t agree with that just yet).

The FDIC and the Federal Reserve’s moves to make depositors whole were reassuring, and when SVB reopened its doors as Silicon Valley Bridge Bank, some even said it could be among the most secure places to keep money, given government backing.

So what can startups and VCs expect to happen? Alex explains:

In banking:

  • Given the use of FDIC insurance capital (the FDIC Deposit Insurance Fund) in this case, it appears that the effective level of deposit insurance in the U.S. banking system is not really capped at $250,000. This changes the calculus of who bears banking risk (and whether there is an inherent moral hazard at play in allowing certain banks to be more aggressive than their peers but with similar backstopping).
  • While the government is saying as much as it can that no public money is being used, folks who use banks — including consumers — have effectively paid into the Deposit Insurance Fund and thus contributed to SVB’s assistance (at a minimum in creating a liquidity pool; potential losses or gains are not clear at this juncture). So, sure, it’s not a bailout in the sense that U.S. taxpayers bought a broken bank, but there is regular folks’ insurance money at play here. That’s why our question regarding moral hazard matters.
  • Bottom line: We could see banking regulations change in the wake of the SVB mess, and that could impact not only where startups and VCs bank but also how startups interact with the American banking system.

For venture capitalists:

  • Some venture capitalists would do better to avoid a branding issue when they suddenly need government help. If you have a history of railing against the government for stepping in to assist others, demanding instant help when your own house catches on fire might not be the best way to get it. The government, to its credit, did what the market wanted anyway. Perhaps there will be some introspection in the aftermath.
  • The VC community is not a community. Instead of banding together to prevent a bank run, VCs told their startups to pull capital and helped power a $42 billion run on SVB. It’s clear that the venture world takes an every-man-for-himself posture when there’s blood in the water.
  • Some venture players simply opened their own accounts to ensure that startups in their portfolio would survive. Some did not, either due to exposure to the same banking issues (personal and fund capital at SVB), a lack of personal capital (not every venture capitalist is wealthy, especially those earlier in their careers or solo managers with lower assets under management) or because they didn’t want to. Some VCs built goodwill over the weekend; others did not. This will impact future funding activity.
  • Bottom line: Concentration of capital led to a huge fustercluck among venture players and startup founders. In the future, we may see attempts at less concentration to prevent situations like this. This could change how startups and their backers bank.

Investors appear to be thinking more long term to minimize risk in the face of financial volatility in the near term. Maëlle Gavet, CEO of Techstars, told TechCrunch+ that she expects companies and VC funds to diversify where they store their capital. “It used to be that startups would bank with SVB or with other banks that are not the top four. Now there’s going to be this divergence toward having one bank account with a big bank and then trying experiments with others. There’s going to be an extreme shift in general in the financial industry when it comes to financing startups.”

VCs also expect the downward trend in valuations to accelerate now that Silicon Valley’s most well-known provider of venture debt is no longer around.

“With lower availability of debt for startups, the demand for equity investment will go up, which will continue the downward adjustment of VC round valuations that’s been underway for the last year. Especially at later-stage companies that rely more on debt as part of their balance sheet, there may be further need to do more cost reductions, accelerating the dynamics of the cycle we’re in,” said Colin Beirne, partner at Two Sigma Ventures.

As for crypto, the industry lost a number of banking on- and off-ramps, signaling that there may be a shift in the space toward decentralization and a need for regulation going forward.

“Silvergate and Signature serve as the major on- and off-ramps for the crypto space with their SEN and Signet products, respectively,” Aaron Rafferty, CEO of StandardDAO, said to TechCrunch+. “The tie for SVB was more on the side of major startup and VC capital for the space with organizations like Lightspeed, Y Combinator.”

As on- and off-ramps in the U.S. are shut down, the industry “needs to, once again, focus on building out an electronic cash system for crypto assets,” Stefan Rust, CEO of inflation data aggregator Truflation and former CEO of Bitcoin.com, said. “Let’s build out the ecosystem organically and make sure we can pay for utility in crypto and also connect crypto for remittance and payments of goods and services in the real world.”

“In the longer term, we can expect to see a rise in alternative banking solutions that offer better terms and conditions, and perhaps more transparency to the industry as a whole, which will be beneficial for business.”

Additionally, investors and traders may be more likely to turn to more transparent and user-friendly solutions, such as the DeFi (decentralized finance) space, as a result of these events.

To find long-term stability, the crypto ecosystem needs to achieve greater decentralization, Rust thinks. “As we saw in 2022, centralization in cryptocurrency is fraught with risks. In fact, it wasn’t just 2022: As far back as Mt Gox in 2014, it has been proven time and time again that centralized entities in cryptocurrency tend to fail.”

That’s where things stand today. The crisis is still unfolding, something that shares in erstwhile SVB competitor First Republic Bank have shown. The bank’s stock lost value through Monday, rallied Tuesday, and then spent Wednesday in the barrel and is down sharply again Thursday morning. We’re watching and will have more as soon as there’s more that you need to know.

Read more about SVB's 2023 collapse on TechCrunch