With the collapse of the Silicon Valley Bank in the US, which served mostly technology workers and venture capital-backed companies, including some of the industry’s best-known brands, there is a scramble among young companies to get their money out of the bank, which was central to the start-up industry in US and abroad.
As the news of the demise spread, global markets fell sharply with bank shares being hit the hardest.
According to a report in New York Times, the fallout was felt across the start-up ecosystem “as entrepreneurs raced to get loans to make payroll because their money was frozen at the bank. Investors doled out and asked for advice in memos and on emergency conference calls. Lines formed outside the bank’s branches. Many in the tech industry were glued to Twitter, where the collapse of a linchpin financial partner played out in real time”.
Reasons behind collapse of Silicon Valley Bank
The implosion rattled a start-up industry already on edge, adds the NYT report. “Hurt by rising interest rates and an economic slowdown over the past year, start-up funding — which had been supercharged by low interest rates for years — has shriveled, resulting in mass layoffs at many young companies, cost-cutting and slashed valuations.”
Silicon was a bank to more than 2,500 venture capital firms, including Lightspeed, Bain Capital and Insight Partners. It managed the personal wealth of many tech executives and was a stalwart sponsor of Silicon Valley tech conferences, parties, dinners and media outlets, says the New York Times.
'Extinction-level event for start-ups'
Regulators rushed on Friday to seize the assets of the beleaguered bank, marking it the largest failure of a US financial institution since the height of the financial crisis almost 15 years ago. “This is an extinction-level event for start-ups,” said Garry Tan, chief executive officer of Y Combinator, a start-up incubator that launched Airbnb, DoorDash and Dropbox and has referred hundreds of entrepreneurs to the bank.
However, there appeared to be little chance of the chaos spreading in the broader banking sector, as it did in the months leading up to the Great Recession. The biggest banks — those most likely to cause an economic meltdown — have healthy balance sheets and plenty of capital.
However, nearly half of the US technology and health care companies that went public last year after getting early funding from venture capital firms were Silicon Valley Bank customers, according to the bank’s website.
$487 million deposited in Silicon Valley Bank
Internet TV provider Roku was among casualties of the bank collapse. It said in a regulatory filing on Friday that about 26% of its cash — $487 million — was deposited at Silicon Valley Bank.
Top venture capital firms in India too went into a huddle over the deeply disappointing development. Hemant Taneja, investor and managing partner at General Catalyst, said in a tweet that several VC leaders such as Accel, Khosla Ventures, Altimeter Capital, Lightspeed Venture Partners, Mayfield Fund, Ribbit Capital, Redpoint Ventures and others met to discuss the aftermath of SVB's downfall.
“Silicon Valley Bank has been a trusted and long-time partner to the venture capital industry and our founders. For 40 years, it has been an important platform that played a pivotal role in serving the start-up community and supporting the innovation economy in the US,” they said in a joint statement.
The bank's collapse has left several start-ups in India worried, especially those who have exposure to its investments and have active accounts in the bank.
Meanwhile, the top VC leaders told start-up founders that now is the time to diversify not panic.
