The Lex Newsletter: SVB was a bank run for the social media age

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Tomorrow at 4pm GMT, I’ll be taking part in an FT subscriber-only webinar on the collapse of Silicon Valley Bank. Register for free here and send questions if you have them.

Dear reader,

Every founder knows the statistics about start-up success. Only one in 10 companies will make it to the end of their first year. The odds of a start-up hitting a billion-dollar valuation are so slim the ones that do are known as unicorns. Survival requires a magic formula that includes a good team, willing customers, generous investors and a lack of predatory rivals. Maintaining access to bank deposits now has to be added to that list. The failure of start-up favourite Silicon Valley Bank has forced a sector-wide rethink.

Thousands of founders have just spent a panicky weekend wondering whether they will be able to recover cash held at the bank. Now that the money has been guaranteed, the rush is on to find safe havens. Many founders are busy splitting deposits into chunks so that none exceeds the $250,000 insured limit.

This is going to make life awkward. Start-ups tend to lose money. That means they need constant access to funds in deposit accounts. SVB was also particularly forgiving of high cash burn and speculative ideas. No other bank is likely to be as welcoming.

The warmth with which the tech sector talks about SVB is at odds with the ferocity with which it withdrew funds last week. For 40 years, SVB has been the US tech sector’s ally, happy to offer services to high-risk start-ups. As Sequoia Capital chair Michael Moritz wrote in the FT earlier this week, venture capital firms would often recommend that start-ups open an SVB account as soon as they had secured seed money. It was home to half of all VC-funded start-ups in the US. 

Column chart of end-year totals ($bn) showing SVB experienced huge growth in deposits and assets in recent years

This, of course, played an important role in its downfall. Flush with investor funds, many companies used SVB primarily as a place to park large deposits. SVB loaned the money out by investing in debt securities. Last year, it opted for long-dated maturities in order to secure a little more yield amid ultra-low interest rates. When rates rose the value of those long-dated securities fell. So did deposits. A downgrade by Moody’s and a rushed capital raise lit the fuse. SVB’s technical insolvency became real as withdrawals increased.

Blame bank management for its choice of securities and tech groupthink for the speed with which the bank fell. VCs are pointing the blame at one another. Did investors with large social media followings spur the bank’s decline with their tweets? Or did they save the sector by stoking fear about contagion and forcing action?

On Sunday, the US government announced that all depositors would be fully protected. Their money is now available via a bridge bank that opened on Monday.

Some blame must be accepted by SVB customers. Most (37,466 to be precise) had deposits above the $250,000 insured limit. Listed streaming media company Roku said it had $487mn, about a quarter of its cash.

What now? Fintechs such as Brex are hoping to offer services to displaced SVB customers. But wariness abounds. Signature and Silvergate have also collapsed. That could make founders seek out the security of larger institutions.

One start-up founder I spoke to yesterday said she had already opened two new bank accounts, both at large banks. Many other founders will follow suit, using one account at a large bank for day-to-day business and another to hold an emergency fund. Others may opt to open money market funds to diversify their investments. There is no expectation that another bank will take SVB’s place at the heart of the tech start-up ecosystem.

Delays and disruptions will occur as start-ups try to open multiple accounts. SVB’s role in providing venture debt leaves a vacuum.

The scare provided by SVB may prompt a slowdown in US interest rate rises. That could encourage a resurgence of risky investments — helpful for start-ups.

Some start-ups will emerge from this upheaval with more confidence in their ability to weather shocks — or at least the impetus to put better back-up plans in place. The VCs who stepped in at the weekend to help portfolio companies will have strengthened relationships. The government’s decision to secure depositors may bolster faith too.

There is an appreciation, too, of the role SVB played. That might lead some enterprising folk to dream up an alternative. You can depend on the tech sector to find a way to be optimistic in the face of a crisis.

Elsewhere in SVB news

Emailed newsletters really came into their own in the SVB crisis. The Pragmatic Engineer, Stratechery, Bloomberg’s Matt Levine, The Diff and Unhedged from the FT’s Rob Armstrong have all been excellent reads in recent days. If you’re interested in tech and finance, they are all worth subscriptions.

Enjoy the rest of your week,

Elaine Moore
Deputy head of Lex

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