SANTA CLARA, CALIFORNIA – MARCH 10: Silicon Valley Bank (SVB) headquarters in Santa Clara, California. (Photo by Justin Sullivan/Getty Images)
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The run of Silicon Valley Bank (SVB
VB
Venture capitalists and the tech startups they fund are flocking back to the new version of a bank designed to serve them just days after the massive withdrawal of deposits, reacting to questions about the quality of SVB’s assets in the face of rising interest rates.
Two things changed: US regulators decided to create an exception to the $250,000 maximum eligible for federal deposit insurance, promising to bail out all depositors, and Silicon Valley decided it was OK to resume banking with Silicon Valley Bank.
“When we saw the start of the bank run, one thing that was clear was that venture capitalists were focused on how to advise an individual company at a time, and we neglected to think about what was right for the community,” says Hemant Tanya , CEO of venture firm General Catalyst. “There could have been millions not getting paid this week, and the already eroding confidence in our industry would have worsened.”
As of Monday, more than 650 venture capital (VC) firms had signed a statement in support of Silicon Valley Bridge Bank, the entity created by the Federal Deposit Insurance Corporation to take over the failed institution that the agency formally shut down on March 12, possibly wiping out investments to shareholders and impairment of the claims of lower-ranking creditors. VCs General Catalyst, Bessemer, Greylock, Lightspeed, Lux Capital, Mayfield Fund, Redpoint and Upfront recommended that their portfolio companies retain or return at least 50% of their total capital to Silicon Valley Bank.
“If you’ve already banked at Silicon Valley Bank and now you have a guarantee from the federal government that your money is safe there, that’s pretty appealing when you’ve spent the weekend pulling your hair out worrying you’re going to lose all your money to a collapse of the banking system,” says Seth Bannon, founding partner at 50 Years, an early-stage venture capital fund. 50 Years transferred $17 million, 90% of its money, back to Silicon Valley Bridge Bank. The remaining 10% is deposited in Mercury.
Venture capital firm Cambrian in San Francisco open a new account with Silicon Valley Bridge Bank, and Enrique Dubugras, co-CEO and co-founder of neobank for businesses Brex, announced that the company is also moving $200 million of corporate funds there.
“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 by transferring deposits left over the last few days,” said a statement from Tim Maiopoulos, CEO of the new entity.
But it is not clear whether support for the new institution is the ultimate goal.
The focus on funneling funds to Silicon Valley Bridge Bank may be an attempt to attract a buyer after the FDIC apparently failed to secure one last weekend. “The purpose of a bridge bank is to either be a transition to another buyer until things firm up, or essentially a divestiture,” said Ann Balser, head of government relations and public policy at Independent Community Bankers of America.
If the bridge bank can attract a strong deposit base, it may be able to find a buyer that will offer similar services to SVB’s rather than going out of business. These services benefited the VC community and tech startups, helping the legacy SVB grow deposits to $175 billion in 2022 from just $55 billion in 2019. SVB’s assets were $209 billion at the end of 2022. It could to be difficult to replicate the SVB banking approach that caters to start-ups that do not always meet the minimum requirements of other commercial banks and lenders.
VCs suggested that their startups allocate about half of their deposits to two or three accounts in addition to SVB, at least one of which should be one of the US Big Four: JPMorgan Chase
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BAC
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When SVB depositors tried to move into these institutions during the panic, they found minimum deposits of up to $20 million restrictive and response times slower than they were used to at tech-savvy SVB.
“The hangover is starting to wear off and people are seeing how important this institution is,” said Eric Bann, co-founder and general partner at Hustle Fund. “There’s a lot of collective movement to make sure that institution remains supported because they’ve really been the most tech-friendly small business bank.”
In addition to better customer service, Silicon Valley Bank is one of the only options startups have for accessing lines of credit. The bank has spent years building relationships in the Valley to assess the creditworthiness of startups and predict the reliability of their backers to step in with money if needed. Early-stage startups simply don’t qualify for lines of credit at 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 that are going through difficulties — trying to raise money, their valuations may be too high and they’ve drawn down credit lines,” says General Catalyst’s Tanjea. “They need a bank that can take the risk of viability and be responsive.”
As the new SVB collects deposits and faces its future, there is discontent among community banks about how it will be saved. SVB and crypto-focused Signature Bank, which also suffered a run, were bolstered after being designated as important to the US financial system by the Treasury Department, the Federal Reserve and the FDIC. Any losses incurred maintaining uninsured deposits at the two banks will be covered by the Deposit Guarantee Fund, an account used to pay depositors when a bank fails. Financial institutions across the country contribute to the fund each quarter, and small banks may not be considered 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, ICBA sent a letter to regulators opposing a proposed 2 basis point increase in fees for all banks. The letter opposes a one-size-fits-all approach, explaining that community banks pose less risk to the fund and will be disproportionately burdened by the contribution increase.
“It gives everyone, including policymakers, an opportunity to re-examine the question: What does too big to fail really mean?” says Community Bank’s Balser. “Before last Friday, I don’t think any of us would have thought that Silicon Valley Bank was too big to fail an institution that needed this type of intervention.”