By Liz Hoffman and Reed Albergotti via Semafor
Some tech industry founders got emails from their venture-capital investors on Thursday urging them to move their money out of Silicon Valley Bank, according to people familiar with the matter, adding pressure to the already troubled firm.
Some entrepreneurs and venture funds themselves have already done so, opening new accounts on Thursday at other firms, including First Republic and Brex, to transfer money out of SVB, according to people familiar with the matter and documents reviewed by Semafor.
Silicon Valley Bank didn’t immediately respond to a request for comment.
The lender, a pioneer in the startup banking industry, forecast a higher-than-expected, double-digit percentage decline in deposits for its 2023 fiscal year and lost $1.8 billion in a firesale of $21 billion of bonds, which it had purchased just before rising interest rates made them less valuable. Yesterday it announced it would try to raise $1.75 billion in fresh cash, with a $500 million anchor commitment from investment firm General Atlantic, and on Thursday Moody’s downgraded its credit rating.
Banks rely on deposits to fund their loans and other securities. Lost deposits need to be offset, typically by new borrowing or by raising cash from stockholders (which SVB is now doing) or by selling assets (which it has also done). The bank is limited from selling the bulk of its problematic bonds because doing so would trigger accounting rules that could exacerbate the loss.
On Thursday, SVB CEO Gregory Becker told clients on a conference call not to worry, according to a person familiar with the matter. The call was earlier reported by The Information.
Some of the bank’s clients may have restrictions, tied to loans, on how much money they can withdraw, one venture capitalist said.
Silicon Valley Bank offers loans to startups that help them continue doing business without having to raise additional funds by selling shares. This lending has become a big business for SVB, inviting competition from larger players like JP Morgan in recent years.
SVB also offers low interest loans and mortgages to entrepreneurs and venture capitalists, helping it bolster its reputation in the tech industry.
Silicon Valley Bank has been a critical partner to the tech industry. Many startups have benefited from the firm’s lending business that it built from scratch.
SVB counted nearly half of U.S. venture-backed tech and life science companies as its clients, according to the 40-year-old bank.
It’s built personal connections with people in the industry, sponsored countless events in Silicon Valley and has doled out low-interest personal loans to tech founders.
Ultimately, none of that stopped people — at least the ones I spoke with — from rushing to wire money out of their SVB accounts on Thursday, fearful of being too late and seeing their startups crash and burn.
As one entrepreneur put it: “Tons of people didn’t get work done today [because they were] calling around about this.”
Two venture capitalists I spoke with wondered why the bigger venture firms didn’t ban together to try and save SVB, or at least publicly support the bank. Whether or not such an idea is realistic is unclear (the Federal Deposit Insurance Corporation would likely step in if SVB is on the verge of collapsing), but it does reflect the deep ties to the industry.
Sure, entrepreneurs can get loans elsewhere. But if SVB doesn’t make it, there may be financial ripple effects. At some point, some startups could lose money if they can’t get their funds out of the bank.
The void would be felt in other ways, though. As one entrepreneur put it: SVB’s myriad events were the “lubricant” of the tech industry.
Loyalty only goes so far, and nobody wants to be the last in line. Self-interest and fiduciary obligations to their own investors might force founders’ and venture capitalists’ hands.
Of course, these narratives can become self-fulfilling. In the spring of 2020, as the reality of the pandemic was setting in, private-equity firms urged their portfolio companies to tap the rainy-day loans they held with banks — to protect themselves by hoarding cash. When they got angry calls from the banks, they walked back the directive and, in some cases, denied they’d issued them at all.
- SVB’s mid-quarter update released yesterday provides a good overview of its circumstances.
- The Financial Times flagged questions about SVB’s investment decisions, which attracted short sellers.
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