Silicon Valley Bank’s collapse drags down the tech industry

The Future. Last week’s failure of Silicon Valley Bank (SVB), the 16th largest bank in the US, has rocked the startup world — draining billions from companies, leaving workers without paychecks, and running a chill down the spine of the financial industry in a way they haven’t felt since 2008. With the cash spigot turned off (unless a buyer emerges or deposits are purchased), mass layoffs could start this week to keep companies afloat… just as the bloodbath of recent months had seemed to dry.

Empty pockets
The collapse of SVB is the biggest bank failure since Washington Mutual in 2008.

Here’s what went down:

• SVB invested a lot of its $175.4 billion in deposits in US treasuries and mortgage-backed securities to keep the money working while interest rates were low.
• But as the Fed raised interest rates, cash flow from new VC-backed startups stalled, and those bond investments turned sour, with losses from a $21 billion investment tipping the dominoes.
• So SVB tried to raise money last week and then tried to find a buyer… but that spooked customers, who started pulling cash in fear of a collapse, which led to a stock freefall — wash, rinse, repeat.
• By Friday, the California Department of Financial Protection and Innovation closed the bank and named the Federal Deposit Insurance Corporation the receiver to handle getting clients some of their money.

The SVB branch offices will be open under the control of a government financial vehicle called the Deposit Insurance National Bank of Santa Clara (if you want to know who has your money).

Bank bounce
The fallout of SVB’s collapse happened immediately.

• Customers, tech startups big and small, will get up to $250,000 of their money quickly (the amount insured by the FDIC), but anything over that is not guaranteed — about $151 billion of deposits in SVB are uninsured.
• Employees are already feeling the burn because, with hundreds of companies and VC firms having their money tied up in SVB, they aren’t receiving their due pay. Companies are looking for alternative ways to make payroll.
• Banks are feeling ripples of the unease now spreading in the financial industry, with the four biggest US banks losing $52 billion in value. Smaller banks similar to SVB may undergo a similar collapse.

Having been a partner to Silicon Valley for decades, expect the entire startup ecosystem to be forever changed. Last week was just the beginning.