While many startup founders and investors slept easier Sunday night knowing their deposits at Silicon Valley Bank were safe, the rapid collapse of the 40-year-old institution could have short- and long-term ripple effects on the tech startup industry.
GeekWire spoke to startup CEOs and investors to get their reactions to the government’s decision to delay deposits and the changes expected in the wake of the bank’s sudden collapse.
The Federal Deposit Insurance Corporation said Monday it has transferred all deposits to a newly formed bridge bank to protect both insured and uninsured depositors.
The move provided peace of mind for startup leaders across the country, who spent the weekend scrambling for solutions in response to the bank run that left a Silicon Valley bank insolvent last week. Some CEOs were worried about the pay this week.
“The government did the right thing and averted an extremely painful scenario,” said William Canestaro, a Washington think tank administrator.
Here’s what we learned.
- Some startup founders spread their cash across multiple bank accounts to mitigate the risk of another bank failing, turning to giant institutions like JPMorgan Chase and Bank of America.
- Fundraising can become even more difficult for startups. Silicon Valley Bank was a leading provider of venture debt and other credit facilities.
- There may be a few silver linings. One venture capitalist is optimistic that the failure will prompt the Federal Reserve to cut interest rates.
Finding a new bank
Devin Ajimin, co-founder and CEO of Seattle-based productivity startup LifeAt, says he and the other founders have started diversifying their capital. He said there will be a broader impact on risk tolerance for people to join and launch startups.
“No one wants to ever wake up (and not know) where millions of dollars of working capital are locked up or if the company you work for is going to make payroll next week,” he said.
The result of this migration could lead to a significant shift in safety from depositors in favor of established large banks, said Marble co-founder and CEO Daniel Lee.
As a result, startups may have fewer options when it comes to choosing banks, potentially limiting their choices to larger institutions and excluding smaller regional banks that may offer unique advantages, he said.
Shares of some regional banks were halted after their prices fell in morning trading on Monday.
It’s unclear which bank will become the startup’s institution of choice, Canestaro said.
About 80% of Seattle’s venture tech and life sciences firms bank with Silicon Valley Bank, putting the region’s innovation sector at higher risk than the national average of about 50%.
“The impact of the loss of SVB will be with us for a long time,” said longtime Seattle startup investor Bob Crimmins. He called SVB “a fixture of the venture-scale startup world.”
Other banks could take advantage of the opportunity to serve SVB’s clients, Canestaro said. For example, Brex received billions of dollars in Silicon Valley Bank deposits on Thursday.
Venture Debt Lender
Silicon Valley Bank has offered a number of services aimed at startups that are not available at more traditional banks, said Dennis Joyce, director of investments at Tacoma Venture Fund.
The bank was a leading provider of venture debt, a type of capital that helps extend the cash runway. The bank’s closure coincides with a slowdown in venture capital markets, raising fears that startups may have more trouble securing funding.
SVB has about $14 billion in venture debt as part of its assets.
The hurdle for bank loans and other forms of debt financing will be “a different world going forward,” Wedbush Securities CEO Daniel Ives wrote in a report Sunday evening.
Impact on investors
Many have called out SVB for its own missteps that have unsettled the markets. But there will be more scrutiny on the influence of tech investors, Canestaro said.
“There’s going to be some serious soul-searching about whether we’re comfortable with a few investors potentially causing a market panic by telling their portfolio companies to get all their money out,” he said. “Like yelling ‘fire’ in a theater, we all suffer when those in positions of power and influence fail to keep up.”
Crimmins said he’s never seen a more concentrated wave of fear and anxiety descend on the startup ecosystem. “The startup world was puzzled about driving a fully functioning car over a cliff,” he said.
While some investors worry that the bank shutdown could further discourage start-up investment, others are optimistic that it could go in the opposite direction.
The bank’s collapse could cause the Federal Reserve to ease interest rate hikes, reigniting investor sentiment in the venture capital market, said Kirby Winfield, founder of Seattle venture capital firm Ascend.
“This may actually be a blessing in disguise,” he said. “If interest rates stop rising (as they should now), I would bet that investors will resume normal deployment rates with confidence in a more favorable capital environment in the near to medium term.”
Aviel Ginzburg, General Partner of Founders Cooperative on Twitter On Sunday night, he resumed investment activities by signing a SAFE (simple stock futures contract) that will take place on Monday.
“What a great way to end the weekend,” he wrote.