The run on Silicon Valley Bank (SVB
Venture capitalists and the tech startups that they finance are flocking back to the new version of a bank designed to serve them just days after they withdrew deposits en masse, reacting to questions about SVB’s asset quality in the face of rising interest rates.
Two things have changed: U.S. regulators decided to create an exception to the $250,000 maximum eligible for federal deposit insurance, promising to make all depositors whole, and Silicon Valley decided that it was okay to resume banking with Silicon Valley Bank.
“When we saw the beginnings of the run on the bank, one thing that was clear was venture capitalists were focused on how to give advice to a single company at a time and we missed thinking about what’s right for the community,” says Hemant Tanjea, CEO of venture firm General Catalyst. “There could have been millions not getting paid this week, and the already eroding trust in our industry would have gotten worse.”
Since Monday, over 650 venture capital (VC) firms have signed a statement in support of Silicon Valley Bridge Bank, the entity created by the Federal Deposit Insurance Corp. to take over the failed institution, which the agency officially closed on March 12, likely wiping out the investments of stockholders and impairing the claims of lower-ranking creditors. VCs General Catalyst, Bessemer, Greylock, Lightspeed, Lux Capital, Mayfield Fund, Redpoint and Upfront have recommended that their portfolio companies keep or return at least 50% of their total capital with Silicon Valley Bank.
“If you already banked with Silicon Valley Bank and now you have a guarantee from the federal government that your money is safe there, that’s pretty attractive when you spent the weekend pulling your hair out worrying that you’re going to lose all of your cash because of a banking-system collapse,” says Seth Bannon, founding partner at 50 Years, an early-stage VC fund. 50 Years has moved $17 million, 90% of its cash, back into Silicon Valley Bridge Bank. The other 10% is deposited at Mercury.
San Francisco venture firm Cambrian opened a new account with Silicon Valley Bridge Bank, and Henrique Dubugras, co-CEO and co-founder of neobank for businesses Brex, announced the company was moving $200 million in corporate funds there as well.
“The number one thing you can do to support the future of this institution is to help us rebuild our deposit base, both by leaving deposits with Silicon Valley Bridge Bank and transferring back deposits that left over the last several days,” according to a statement from Tim Mayopoulos, CEO of the new entity.
But it is not clear that supporting the new institution is the ultimate goal.
The focus on directing funds to Silicon Valley Bridge Bank may be an effort to help attract a buyer after the FDIC was apparently unable to secure one last weekend. “The purpose of the bridge bank is intended to be a transition to either another buyer, while things get shored up, or essentially a wind down,” says Anne Balcer, chief of government relations and public policy for the Independent Community Bankers of America.
If the bridge bank is able to attract a strong deposit base, it may be able to find a buyer that will offer similar services to SVB’s instead of winding down operations. Those services have been beneficial to the VC and tech startup community, helping the old SVB increase deposits to $175 billion in 2022 from only $55 billion in 2019. SVB’s assets were $209 billion at the end of 2022. It may be hard to replicate SVB’s banking approach, which catered to startups that didn’t always meet the minimum requirements of other commercial banks and lenders.
VCs suggested their startups spread about half their deposits at two or three accounts in addition to SVB, at least one of which should be one of the U.S. Big Four: JPMorgan Chase
When SVB depositors tried to move to those institutions during the panic they found that minimum deposits as high as $20 million were restrictive and response times were slower than they were used to at tech-savvy SVB.
“The hangover has started to fade away, and people see how important that institution is,” says Eric Bahn, co-founder and general partner at Hustle Fund. “There’s a lot of collective movement to make sure that this institution remains supported because they really were the friendliest small-business bank for tech.”
In addition to better client service experiences, Silicon Valley Bank is one of the only options startups have to access credit lines. The bank spent years building relationships in the valley to assess credit worthiness of startups and predict the reliability of their venture backers to step in with cash if needed. Early-stage startups simply are not eligible for credit lines at the many banks which prefer five or even 10 years of financial history for a debt applicant.
“If you think about the market environment we’re in now, there’s a bunch of companies going through difficulty–trying to raise money, their valuations may be too high, and they have drawn lines of credit,” says General Catalyst’s Tanjea. “They need a bank that can underwrite the risk of viability and be accommodating.”
As the new SVB gathers deposits and confronts its future, there is grumbling among community banks about the manner of its rescue. SVB and crypto-focused Signature Bank, which also suffered a run, were supported after being defined as important to the U.S. financial system by the Treasury, Federal Reserve, and FDIC. Any losses incurred to support uninsured deposits at the two banks will be covered by the Deposit Insurance Fund, an account used to repay depositors when a bank fails. Financial institutions across the country contribute to the fund quarterly, and small banks may not be deemed to qualify as systemically important if they get into trouble.
Even before the Silicon Valley Bank crisis, the Deposit Insurance Fund was a point of tension between community banks and the FDIC. In August, the ICBA sent a letter to regulators opposing a proposed 2 basis point increase to contributions for all banks. The letter argues against a “one size fits all” approach explaining that community banks pose less of a risk to the fund and would be disproportionately burdened by the contribution increase.
“This gives everyone, including the rule makers, an opportunity to revisit the question: what does too big to fail really mean?” says community bank representative Balcer. “I don’t think prior to last Friday any of us would have thought Silicon Valley Bank was a too big to fail institution that required this type of intervention.”