Why Silicon Valley Bank failed (and what are the effects)? 😱

March 13, 2023

10,000+ businesses are at risk, and 100,000+ employees' jobs are at stake, according to YCombinator's petition to the US Secretary of the Treasury. (This is just an estimate, and the actual number could be even more.)

If you are working for a startup which is incorporated in the US. There is a 7/10 chance that your startup is banking with Silicon Valley Bank. It almost has a 25% market share in Silicon Valley, and on Friday, the Silicon Valley bank or SVB shut down. About $175B of startup deposits were frozen, and no one could withdraw money. Insurance covers only 5% of the total deposits in the bank.

Let me explain what happened, how it happened, and the lessons learned. 

The safest place for money right now. Courtesy: Breaking Bad

🤔 Silicon Valley Bank - What happened?

SVB is a bank that specializes in funding tech companies and start-ups. Between 2019 - 2021, their deposits tripled considering the funding bull run - from $60 bn to $189 bn.

When you deposit money into any bank, they deploy it into investments. So say you deposit $1000, and the bank pays you $1/yr to keep it there. The bank invests that $1000 in hopes of making $5. They give you your $1 interest and keep the other $4. This is the ideal scenario. Then a bunch of things happened.

SVB put their investments into mortgage-backed securities, which gave a return of 1.5%. When the interest rates were low, it was fine. (These are the same financial investments which were at the centre of the 2008 financial crisis.)

Then the following things happened in quick succession:

  • The US Federal Reserve raised interest rates, which made it more expensive for investors to borrow money.
  • Overall startup funding scene slowed down because of that (hence many layoffs have been happening recently)
    So more startups started taking money than depositing. 
  • To give this money to its clients - startups, Silicon Valley Bank sold those investments.

But the bank had made these investments when interest rates were lower but had to sell them when interest rates were higher, which caused the bank to lose almost $2 bn. 

🧐  The Downfall 

The stock fell rapidly; as a result, more startups started to withdraw money in a panic since existing investors suggested so. That depleted the bank's reserves even faster. Ironically, Forbes America featured Silicon Valley Bank in their best banks list a few days back and was named in their inaugural financial all-stars list.

SVB tried to raise more money, but they failed to do so. Eventually, the bank had to shut down and be taken over by banking regulators. This could be the second-largest banking collapse after the Lehman brothers. 😔😓

Garry Tan - CEO of YCombinator, called this “an extinction-level event for startups”. When events like this happen, either the bank is taken over by a larger bank, or congress bails out the bank with taxpayers’ money. Considering the scale of this crisis, it will not be allowed to fail.

In recent developments, the regulators have closed another bank, Signature bank. The govt announced that the SVB deposits would be safe and money would be available from Monday. This is a huge relief, and as some prominent VCs have said on Twitter - the market should determine your startup's success, not your banking partner. 

🧐  Indian Impact

If you think that this is happening in the USA and if you are sitting in India, there will be no impact. You're mistaken!

The majority of the Indian startups which raised funding are usually registered in US or Singapore. 30% of the Ycombinator companies have exposure to SVB. Any Indian company which is part of the Y combinator has at least partial exposure.

And if they are registered in the US, there is a high probability that SVB is the only bank they work with.

Learnings from the crisis

Silicon Valley Bank's failure is a reminder that having single points of failure can be risky.

  • If you have only one bank, consider getting a second one.
  • If you rely on only one marketing channel, start testing more.
  • If you have only one critical employee, consider training more employees.
  • If you have only one major customer, consider diversifying your customer base to reduce the risk of losing that customer.
By eliminating single points of failure, you can reduce the risk of a catastrophic failure and ensure that your business can continue operating even if one part fails.

Tool of the Day

SVB Helpful Resources

This website is a collection of resources on how to deal with the fallout of the SVB crisis. It also contains detailed explainers of what happened along with alternate financing options in the short term.

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