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The Rise and Fall of Silicon Valley Bank: A Cautionary Tale for the Tech Industry
How a Bank Run and Risky Financing Led to the Second-Biggest Bank Failure in US History and Its Implications for Startups and Investors
The recent collapse of Silicon Valley Bank has sent shockwaves throughout the tech industry. Founded in 1983, it was an important source of funding for start-ups and venture capitalists, providing a vital source of fuel to the tech industry. However, on March 9th, 2023, customers of the bank attempted to withdraw $42 billion in deposits in one day. This caused a bank run that resulted in its closure by regulators, making it the second-largest bank failure in the US after Washington Mutual in 2008.
In this article, we will look at what caused Silicon Valley Bank to fail, its impact on the industry, and what happens to its customers. We will also examine how it could worsen the current crypto crisis and what this means for the future of the start-up landscape.
Silicon Valley Bank was an important engine for the tech industry's success, providing a financial partner to many VC-backed startups. The bank worked closely with 2,500 VC firms and tech executives, claiming to be the "financial partner of the innovation economy." However, its deposits grew as IPOs, SPACs, and VC investments went on at a frenetic pace, and the bank became vulnerable to interest rate rises.
When interest rates rose, VCs stopped investing, and start-ups started drawing down more of their money to pay for expenses. SVB had to come up with cash to make that happen, and it sold $21 billion of securities, resulting in an after-tax loss of $1.8 billion. It also came up with a plan to sell $2.2 billion in shares to help shore itself up. Moody's downgraded the bank's credit rating, and customers tried to withdraw a quarter of the bank's total deposits on a single day.
This bank run happened fast, in less than two days, and it was over the next day. The share sale was canceled, and Silicon Valley Bank tried to sell itself, but regulators stepped in. The FDIC created a new entity, the Deposit Insurance National Bank of Santa Clara, for all insured deposits for Silicon Valley Bank, which will open for business on March 13th. People who have uninsured deposits will be paid an advanced dividend and get a little certificate, but that isn't a guarantee people will get all their money back.
This collapse of the bank has a significant impact on the start-up landscape, with many start-ups struggling to make payroll, among other expenses. Even small disruptions to cash flow can have drastic effects on individuals, companies, and industries. Payroll isn't the only expense that a company has, with payments to software providers, cloud services, and so on also being affected. This collapse of Silicon Valley Bank has made it harder for start-ups to raise funds and caused panic in the industry.
Furthermore, this failure didn't have anything directly to do with the ongoing crypto meltdown, but it could potentially worsen that crisis, too. Crypto firm Circle operates a stablecoin, USDC, that's backed with cash reserves — $3.3 billion of which are stuck at Silicon Valley Bank. That stablecoin should always be worth $1, but it broke its peg after SVB failed, dropping as low as 87 cents. Coinbase stopped conversions between USDC and the dollar.
The collapse of Silicon Valley Bank is a significant event that has sent shockwaves throughout the tech industry. It highlights the importance of having diverse investment strategies, risk management, and proper regulatory oversight. It also shows how vulnerable the industry can be to panic and rumors, leading to a bank run that can quickly cause the collapse of even the most prestigious banks. The aftermath of this collapse will undoubtedly lead to changes in the start-up landscape, with investors and entrepreneurs rethinking their investment strategies and risk management