Tech shakes up: How Silicon Valley Bank collapsed

For the past 40 years, SVB has been a pillar of the startup ecosystem. It functions as a reliable financial institution for VCs to raise funds, and has built strong ties with founders and investors. It remained an important stabilizing factor both when the dot-com bubble burst in 2001 and when Lehman Brothers collapsed in 2008.

For years, SVB has worked hard to build good relationships with founders and investors in the startup ecosystem. They have sponsored lavish events, invited VCs to ski lodges and, more importantly, made drastic bets against unproven companies abandoned by old-fashioned banks.

Many in Silicon Valley say there is no replacement for SVB. It did everything from offering venture debt to personal mortgages to founders who had little track record of doing business with banks and would be turned away from other financial institutions.

“SVB has been working with VCs for 40 years, and they know who to trust and who not to trust,” Suster said.

As such, SVB’s depositors, though not very numerous, were very devoted to the bank. Approximately 37,000 customers have assets of approximately 157 billion dollars (approximately 21 trillion yen at an exchange rate of 135 yen to the dollar, 74% of the bank’s assets), and the average account size is 4 million dollars (approximately 540 million yen). yen).

Those facts helped boost the bank’s reputation as “Silicon Valley’s trusted bank” during its best days. But the crisis has backfired on that reputation. The Federal Deposit Insurance Corporation (FDIC) under SVB’s control protects only $250,000 per account. That means 87% of the bank’s $173 billion in customer deposits at the end of 2022 were uninsured.

Flaws in corporate governance

SVB in 2021 had problems that other banks would envy. Deposits poured in from startups that had made large funding rounds and needed a safe place to store their cash.

At that time, VCs were competing to invest in startups, and SVB’s assets increased significantly as startups closed deals and deposited funds in banks at a dizzying pace.

The problem was that it couldn’t keep up with the explosive growth in deposits, which the SVB calls its “net profit target.”

So looking for other sources of income, the bank’s management ended up betting big on mortgage-backed securities, securing more than $80 billion at a 10-year interest rate of 1.56%.

A former SVB executive said the decision was “silly.” Instead of betting on mortgage-backed securities, he should have settled for shorter-term, lower-yielding securities.

“The SVB should have told Wall Street to move out and keep its balance sheet investments aligned with the bank’s rapidly changing operating environment in the startup world.” Former SVB executive)

To make matters worse, SVB’s board is dominated by venture capitalists, consultants and startup founders.

“There were no bankers on the board. Humility is required for those given the responsibility of running this Silicon Valley icon,” said Montgomery.

The bankruptcy seems to have come out of nowhere, but the months leading up to it were also marked by glaring missteps in corporate governance.

The company’s chief risk officer, Laura Izurieta, who had been charged with preventing a crisis that would have forced SVB into bankruptcy, was forced to close its $4 million deal in April 2022. ) resigned shortly after selling a substantial stake. Her position as chief risk officer remained vacant for nearly a year until her replacement was announced in January 2023.

The market value of SVB mortgage bonds plummeted as the Federal Reserve (Fed) aggressively hiked interest rates to combat inflation, pushing yields on government bonds above 2%. That left the bank with billions of dollars in write-downs and legally made it bankrupt. Of course, this is just a valuation loss, and SVB could have overcome this situation.

As VC funding dried up and startups scrambled to extend their runways, many started to withdraw funds from their accounts. SVB’s deposit balance, which stood at $198 billion in March 2022, fell to $165 billion at the end of February 2023.

Bank runs caused by SNS

SVB sold $21 billion in securities on March 8, along with additional equity stakes, on March 8, amid fears that the tech sector’s continued downturn will drive startups to exit prematurely in the second half of 2023. announced plans to raise billions of dollars in financing.

Normally, the announcement would be a slight drop in the stock price. “This is not a crisis,” says Suster.

“SVB had already raised $500 million from General Atlantic and had put out a public offering to raise up to $2.25 billion. (Suster)

But this alone was enough to shake the founders and executives who had already witnessed the collapse of crypto exchange FTX and the closure of crypto-focused Silvergate Bank.

Allegedly, SVB CEO Greg Becker called customers and said, “(SVB) has enough liquidity to help them — you know, SVB is in crisis. I have to spread rumors that I’m in the middle of the day,” he warned. But this only added to the panic.

“The problem was that the SVB that announced the public offering had a quiet period so they could say very little, and we didn’t expect so many VCs to suddenly advise all portfolio companies to withdraw their money. That’s it.

And it was also a problem that we were connected on social media and everyone heard all at once, ‘Oh no, this bank is going to go bankrupt.'” (Suster)

Tyler Griffin, managing partner at VC firm Restive, also said, “This bank run looks like it was triggered by Twitter. It wouldn’t have happened before.”

Founders Fund, led by Peter Thiel, as well as Coatue Management and Union Square Ventures, Bloomberg reported on the afternoon of March 9. ), some high-profile VCs in the tech industry have advised portfolio companies to transfer assets from SVB.

“We are telling our portfolio companies to look at larger banks that are safer,” said Eugene, an investor at One Way Ventures, which withdrew from SVB on March 9.・I’m Eugene Malobrodsky.

“Governments would hardly let JPMorgan or Bank of America go bankrupt,” Malobrodsky said.

Some big banks jumped at the opportunity to woo Silicon Valley. For decades, Silicon Valley has shunned Wall Street banks in favor of local banks. At least JP Morgan called the VC on March 9 and urged them to withdraw money from SVB, according to multiple sources.

Late on March 9th, Suster held an impromptu meeting with 15 top tech VCs to brainstorm ways to save SVB, but it was too late. At this point, several well-known people (Suster declined to name them) were trying to get the founders to pull the money out of SVB.

Documents released on March 10 revealed that SVB withdrew $42 billion (approximately ¥5.67 trillion) at the close of business on March 9. billion dollars (approximately 21.73 trillion yen).

Ripples across the tech industry

Withdrawals from SVB were suspended on March 10, and the bank’s assets were placed under federal control. The federal government plans to sell SVB’s assets and repay depositors, he said. Meanwhile, many startups are struggling to pay bills and find working capital.

Ashley Tyrner, founder and CEO of food box delivery startup FarmboxRx, was vacationing with his family in Costa Rica on March 9, when his company invested millions of dollars. Bad rumors about SVB, who entrusted the

While SVB’s bankers and customer service representatives hadn’t heard about the impending bank run, we received a frantic-looking message from the COO, who had read about the panic on TechCrunch.

“We found out when the media started reporting,” Tyner told Insider. Tyner tried to transfer the company’s balance through SVB, but was locked out of his online account. He frantically called his account rep but got no response.

On the morning of March 10, when the FDIC announced that it would take the troubled SVB under its control, and the biggest bank failure since the 2008 Lehman Brothers collapse became a reality, Tyner and thousands of other people had deposits. was trying to withdraw the deposit as well.

The millions of dollars in Tyner’s account remain unanswered by SVB and cannot be withdrawn. Tyner is both shocked and furious.

“It’s ridiculous that I’m going to lose money because SVB made the wrong investment decision,” Tyner said.

On the 10th, VCs lamented the demise of the famous SVB.

“SVB has been a great partner to many VCs, startups and investors, and should have been more supportive,” said VC Spiros Margaris.

“The ‘litmus test of loyalty’ has failed. This will plague the VC and startup communities in many ways for the foreseeable future…Once you’ve calmed down, you’ll realize how much you’ve lost.” ”

Suster agrees.

“It will be harder for startups to do business with banks in the future. Our industry has strangled itself.”