Silicon Valley Bank was a top lender for startups. Now it’s the largest bank failure since the Great Recession.
Ashley Tyrner, the founder and CEO of Boston-based FarmboxRx, which delivers fresh-produce nationwide, was on vacation with her family when she found out that her bank–Silicon Valley Bank–was in serious trouble. “I just see this explosion happening. My COO had initiated a transfer of our entire balance from SVB,” she says. When Tyrner read the news yesterday, she immediately tried to approve a wire transfer around 4 p.m. But she couldn’t log into her SVB account. FarmboxRx’s representative at SVB wouldn’t answer her calls, but did text her back once, expressing sympathy. The customer-service line never picked up.
Her company has eight figures still tied up in the bank, which was closed by the Federal Deposit Insurance Corporation today. “This has been the most challenging 18 hours of my professional career–if not my life,” Tyrner says. She feels fortunate that FarmboxRx has diversified accounts, and banks with two other institutions. The company had decided to begin working with SVB two years ago when it began to seek venture-capital investment. “It’s known in the industry as the place that all VCs bank at. This is where they push everybody to bank, because they are ‘founder friendly’ and ‘startup friendly,'” she says.
Those VCs, of course, were among the first to abandon ship, leaving customers like her holding IOUs. Still, the bank will reopen Monday as National Bank of Santa Clara, under federal control. Deposits of up to $250,000 are guaranteed by the FDIC. Those with larger accounts essentially get IOUs, and may or may not come out whole.
Andrew Jernigan was one of the luckier customers. He feels immensely relieved that he switched most of the funds for his travel insurance company, Insured Nomads, to Mercury Bank from Silicon Valley Bank in the last year. But it wasn’t because he thought the bank, was on shaky financial ground.
The reason? While SVB marketed itself as a great financial resource for tech startups, Jernigan felt that the bank wasn’t tech-savvy. “Sadly, I thought that I had opened an account with a bank that was built for startups,” Jernigan says. “I didn’t know what to expect, but I did expect more than just a checking account based on how they promote themselves.”
SVB was founded in 1983 in Santa Clara–and in Jernigan’s view, he found that the technology has yet to catch up 40 years later. He estimates that the banking platform hasn’t changed in years given its outdated appearance, quipping that it “looks like you’re looking at something built in 1990.” Even worse, he found that mobile deposits often failed.
If Jernigan wanted to deposit an investment check, for example, he’d first have to deposit the check to Mercury Bank. From there, he’d transfer it over to SVB, since mobile deposits were so flaky.
“I find that other banks that have been born since then, that are more fintech enabled, are more startup friendly,” he adds. “They have more resources. Sure, they don’t have the same clout, but they really helped young companies more than SVB.”
Now, young companies, venture capitalists, and others that banked with SVB are scrambling to find new bankers–and recoup their own money–in what has quickly spiraled into the largest bank failure since the 2008 financial crisis, according to the Associated Press.
What caused the failure of a once highly profitable bank? High interest rates play a part. “In the case of SVB, we’re seeing ‘maturity risk’ where because they invested so heavily into Treasury bonds, their investments declined in value as rates went up,” says Brian Dally, co-founder and CEO of Groundfloor Finance, an Atlanta-based real estate lending marketplace. “This isn’t a problem if you can hold on to the investment until maturity, but they couldn’t and had to sell.”
Once they did, many tech investors, including billionaire entrepreneur Peter Thiel, encouraged startups to withdraw their funds. SVB was now caught in a doom loop.
Jernigan says he was contacted last night by an investor in Singapore who knew of his existing relationship with SVB and urged him to pull his funds out.
The question now shifts to how much damage depositors will suffer as a result of SVB’s collapse. A recent bankruptcy filing from BlockFi–a victim of the FTX meltdown–shows that the digital asset lender held $227 million with SVB. Even worse for the unlucky firm, the money is in a non-FDIC insured money market mutual fund, no less.
With $209 billion in assets, SVB was the 16th largest bank in the United States.
Forty-four percent of U.S. venture-backed technology and healthcare companies that went public last year had banked with SVB, according to data from PitchBook.
Companies such as Zola, Tala, Bowery, ZipRecruiter, The Bouqs Co. and pymetrics (now Harver, following an acquisition) had banking relationships with SVB, according to the bank’s webpage that remained live as of Friday early afternoon. Frida Polli, the co-founder and CEO of pymetrics, is quoted on the same webpage about how the bank “has a network that is invaluable for entrepreneurs.”
The clout, in part, is what initially drew in Jernigan in the first place. But that did him little good, compared with some of the benefits he’s now reaping in his current banking relationship with Mercury. For one, Jernigan says that Mercury introduces companies to potential investors, in addition to holding social and networking events. Service is also fast, he adds.
Still, Jernigan didn’t withdraw all of his assets from SVB. In fact, he had opened up a new account this past week with SVB for euro currency given that Mercury didn’t have that ability.
When Jernigan heard the news about the bank’s closure this morning, he attempted to log into his account but was met with a 503 error page. Lucky for him, his remaining deposits are insured given that he held a balance of less than $100,000. While the FDIC insures deposits of up to $250,000, reports estimate that more than 93 percent of SVB’s $161 billion in deposits were uninsured.
That includes Tyrner, who now sees even tougher times ahead. “We’re on the path to a recession,” Tyrner says. “This is apparent now.”
-Christine Lagorio-Chafkin contributed to this report.
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