How Silicon Valley Bank Went Under - And the Tech Execs Who Stepped Up

Silicon Valley Bank — one of the most prominent banks in the country, which held relationships with more than 50% of the U.S.’ venture capital-backed companies — experienced a historic collapse on Friday that has sent shockwaves throughout the banking industry. Now, in a bid to boost confidence in the U.S. banking system, the Biden administration has moved to safeguard all deposits at SVB and fellow fallen financial institution Signature Bank.

Since its founding in 1983, SVB has been a key player in supporting startups and other companies backed by venture capital. For hundreds, perhaps thousands, of numerous tech and innovation startups, this provided new players with a reputable and widely-accepted option to secure loans and hold funds.

As of Friday, however, the bank is now widely considered to be the single largest bank failure since the Great Recession of 2008. For nearly an entire year, the firm went without a chief risk officer. And just recently, their CEO was caught cashing out $3.6m worth of stock a couple of weeks prior to the bank’s collapse as well.

While the ongoing fragility of the tech sector hasn’t exactly been doing SVB any favors, the bank’s swift slide into complete failure and utter chaos in just a few short days has taken many by surprise. This news prompted a series of questions that started to rise among the public: How could this have happened? And in what ways will this affect the banking industry moving forward?

What Went Down?

With private fundraising made more expensive thanks to the Federal Reserve’s attempt to combat inflation with higher interest rates, a growing number of tech startups were forced to borrow more and more from SVB as investors became more cautious. The bank itself, however, was quietly struggling to meet the recent steady rise in financial demand, and needed a plan in order to quickly make up for its low liquidity.

Surely enough, red flags were flying high that Wednesday when the SVB Financial Group announced a $1.75b share sale in an attempt to bounce back from a devastating $1.8b loss catalyzed by an approximate $21b sale of low-value securities.

Ultimately, the capital raise did little to bolster confidence in venture-capital clients and founders, who were soon encouraged to quickly pull their funds from SVB en masse. Driven by investors with growing concerns over a potential bank run, this led to a direct negative impact on the company stock the following day on Thursday as it plummeted by 60% or an estimated $80b+ depreciation in share value.

Before long, public trust in bank stocks across the board also started to wane, resulting in a same-day $52b market value loss among the four biggest banks in the U.S., including Citigroup, JP Morgan Chase, Wells Fargo and Bank of America. Smaller banks also reported significant drops in shares, with San Francisco-based First Republic Bank stock falling by 17%, signaling a more widespread lack of confidence in the security of bank funds within the sector amidst rising interest rates.

By Friday morning, trading had been put on pause. Come Friday afternoon, the California Department of Financial Protection & Innovation shut down the bank entirely and relinquished the firm over to the FDIC shortly after. Widespread panic ensued over the weekend as hundreds of companies with millions locked up at SVB were promised a middling $250k in FDIC-insured funds, and nothing more.

That is until Sunday rolled around, when U.S. regulators announced deposits at the bank would be protected and available in full by Monday morning. This announcement was brought alongside the official closure of Signature Bank, an institution that made its name off the back of real-estate ventures and, more recently, its dive into the crypto industry.

In the Wake of the Collapse, Who Stepped Up?

As small startups and their founders scrambled to make payroll while the future of the tech industry was being threatened, many of its prominent leaders stood up, looking for any way they could lend a helping hand to those most affected by the crisis.

CEO of OpenAI Sam Altman and renowned venture capitalist Vinod Khosla were among the first to lead the charge in support of small businesses, offering good-faith loans to periled companies and encouraging other VCs to do what they can to help.

Garry Tan – the President and CEO of Y Combinator, a major accelerator for early-stage startups – started a petition for startups at risk, imploring affected businesses all over Twitter to sign it and prompt regulators to take action. The petition received more than 5,000 signatures from various CEOs and founders by the time the U.S. government stepped in on Sunday.

Some companies, like those within the financial services and technology sphere, were taking the opportunity to assist depositors while simultaneously gaining goodwill to draw in new potential customers.

Brex – a fintech business dealing in credit and cash management accounts – opened an emergency bridge loan to assist companies with funds tied up at SVB so they could meet payroll and additional operational needs. After only a day following the bank’s collapse, the initiative had received over $1 billion in requested funds. Since the presence of these startups are necessary for the company to thrive, Co-CEO and founder Henrique Dubugras told Forbes, “solving this is very good business for us.”

How Will This Impact the Future of Banking?

In an interview with Reuters, founder and investment manager of AlphasFuture LLC Geetu Sharma discussed how the impact of interest rates are spreading beyond its effects on the greater tech ecosystem. And according to Sharma, company liquidity may pose a more omnipresent issue for a number of business sectors if increased interest rates are left unaccounted for:

“If you look at the chain of events we had, once we started seeing the rate of increases, we first had the most speculative part of the market kind of see a collapse, whether it was in the crypto space, these banks, the FDX, and now it seems that it is expanding into this private market space, venture capital, [and] asset prices may be coming down and liquidity is becoming an issue,” said Geetu Sharma.

Although the effects of SVB’s looming collapse are already rearing their heads among other financial institutions, as is the case with the aforementioned First Republic Bank and, now, Signature Bank, Sharma says the “trillion dollar question” is a matter of exactly how far these ripples will reach. So far, those ripples are slowly becoming waves as they continuously sweep across the country, spilling over into the global banking industry as many wonder what the future of banking will look like.