Digital Zeitgeist – SVB Fights A Race Against Time To Stop A Bank Run As Funds Advise Withdrawing Cash
One Bank Folds Another Wobbles And Wall Street Ponders A Crisis!
Silicon Valley Bank (SVB) is an American commercial bank. SVB is on the list as one of the largest banks in the United States and is the biggest bank in Silicon Valley.
Fears regarding the wellbeing of Silicon Valley Bank’s finances, a significant lender to new businesses, prompted Peter Thiel’s Founders Fund and other prominent venture capitalists to advise portfolio companies to withdraw their funds, despite the fact that the top executive of the bank urged everyone to remain calm. This caused widespread panic in the world of startups.
The turmoil followed a surprise announcement from Santa Clara, California-based SVB that it was issuing $2.25 billion of shares to bolster its capital position after a significant loss on its investment portfolio. The stock plunged 24% in premarket trading before exchanges opened in New York on Friday, set to extend its 60% decline on Thursday. Bonds had posted record declines, igniting a broad selloff in US bank shares that also spread to Asia and Europe.
According to information provided by a source who was familiar with the matter who requested anonymity in order to disclose private information, Founders Fund reportedly requested that its portfolio businesses transfer their assets away from SVB. Coatue Management, Union Square Ventures, and Founder Collective have all instructed the companies in their respective portfolios to withdraw their funds. Another large venture capital company, Canaan, is said to have instructed the companies in its portfolio to withdraw funds only when it was absolutely necessary to do so.
According to a source who is acquainted with the case, SVB Financial Group Chief Executive Officer Greg Becker convened a conference call on Thursday during which he advised customers of SVB-owned Silicon Valley Bank to “stay calm” in the face of growing concerns over the bank’s financial standing.
At around 11:30am local time, Becker conducted the conference call with the investors, which lasted approximately ten minutes. According to the source, he encouraged the bank’s clients, who included investors in venture capital, to support the bank in the same manner that it has supported its customers over the course of the previous 40 years.
Officials from Union Square Ventures, Founders Fund, and Coatue all declined to comment on the matter. Officials from Silicon Valley Bank, Canaan and Founder Collective didn’t immediately respond to requests for comment.
In its note to companies, Founder Collective said: “Over the long term, we don’t believe that deposits are likely at risk, but the shorter term is hard to predict.”
On Thursday, concerns about the lender ricocheted across Silicon Valley and Wall Street, causing a gauge of US bank stocks to fall by the highest since June of 2020. There is “a good deal of panic,” said Jenny Fielding, managing partner at The Fund, which invests in early stage companies. Fielding said she is watching the situation with the bank closely and has not yet advised her portfolio companies on how to proceed.
Garry Tan, president and chief executive officer of Y Combinator, issued a warning to the businesses that are part of the organisation’s network that the possibility of insolvency exists, and he hinted that the entrepreneurs should consider decreasing their exposure to the lender. According to a post written by Tan that was accessed by Bloomberg News, Tan stated that “We have no specific knowledge of what is happening at SVB. But, whenever you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously and prioritise the interests of your startup by not exposing yourself to more than $250,000 of exposure there.” In addition, he said, “Your startup will fail regardless of the reason when it runs out of money.” The Y Combinator person we reached out to declined to respond.
The venture capital company Tribe Capital has also recommended to the companies in its portfolio that they transfer part or all of their balances from SVB. In a communication with portfolio companies that was reviewed by Bloomberg, Tribe co-founder Arjun Sethi said, “What’s important to understand is that banks all have leverage and they use deposits, so almost by definition any bank with a business model is dead if everyone moves.” Sethi was referring to the fact that banks all use deposits. “Since the risk is not zero and the cost is very low, it is preferable to diversify your risk if at all possible,” he continued.
Another firm, Activant Capital, sent emails and texts to its portfolio company CEOs encouraging them to transfer their SVB balances to other lenders, and is helping some move capital to First Republic Bank, CEO Steve Sarracino said.
In an email Thursday morning signed by Mark Lau, head of Silicon Valley Bank’s venture practice, SVB said it had heard from many of its clients over the past 24 hours regarding questions about the company’s 8-K filing on Wednesday, according to the contents of the email about the conference call reviewed by Bloomberg.
SVB’s shares sank to their lowest close since September 2016 on Thursday. Becker’s call was reported earlier by the Information. The shares continued to tumble in late trading, falling as much as 30%.
“This is a classic bank run, and when the bank run starts you don’t want to be the last guy there,” Ava Labs President John Wu said in an interview with Bloomberg Television. Wu said that his company had “already diversified” away from its reliance on Silicon Valley Bank.
A chief executive officer of a startup company who requested anonymity stated that his company made many failed attempts during the entirety of Thursday to withdraw millions of dollars from Silicon Valley Bank. Bloomberg was informed by a number of other customers of the bank that they had been successful in withdrawing cash on Thursday without substantial complications; although, at one point throughout the day, one of these customers was unable to access the SVB website.
Some VCs said they were standing by the bank. “It is truly unfortunate that several GPs and companies are making a tough situation for SVB worse by pressing the panic button,” said G Squared founder Larry Aschebrook. “SVB has supported entrepreneurs and GPs at all stages of their businesses and that partnership should run both ways.”
Investor Keval Desai, founder of Shakti, said not only was he not telling his portfolio companies to withdraw funds, but he placed an order to buy the bank’s stock today, with a limit order of $101.
“I am not Warren Buffett,” Desai said, cautioning he was not dispensing investment advice. “But I think this is a buying opportunity.”
One prominent investor, Mark Suster, warned companies against overreacting to news about the bank. “I believe their CEO when he says they are solvent,” Suster wrote, “and not in violation of any banking ratios.”
Eren Bali, the CEO of the startup Carbon Health, also said his company had confidence in SVB. “We don’t believe there’s any risk with deposits,” Bali said. He called SVB a “very reputable, well-regulated bank” and said it “has done an incredible job supporting the startup ecosystem so we’re hoping they’ll recover quickly.”
An email thread of more than 1,000 founders from Andreessen Horowitz was abuzz with the news Thursday, with many encouraging each other to pull cash from the bank. At one point on the thread, General Partner David George weighed in. “Hi all,” he wrote in a post reviewed by Bloomberg. “We know you have questions about how to handle the SVB situation. We encourage you to pick up the phone and call your GP.”
According to a partner at a significant venture firm, a similar thread was circulating among the chief financial officers of significant businesses.
A great number of startup owners and executives voiced their concerns on the impact that the failure of SVB would have on Silicon Valley’s infrastructure on the forums. It is possible that the bank would attempt to sell off its holdings in its portfolio firms, which would further bring down the values of many young businesses that are already struggling. These decreased asset values would, in turn, have the effect of significantly weakening the balance sheets of other banks, hedge funds, and crossover funds that own the same assets.
Two early-stage companies that are a part of Dan Scheinman’s portfolio called him on Thursday with the question of whether or not they should terminate their accounts with the bank. Scheinman is an investor who has funded many startups, one of which is Zoom Video Communications Inc. Before taking any actions, he encouraged them to look for further information first.
“What do we know about banks you would switch to? Are they in better or worse shape?” he said. “It is a pain to switch, but it is more of a pain if the bank fails.” he advised.
online sources: uk.yahoo.finance.com, bloomberg.com