Oh, how the mighty have fallen. The state of California was forced to step in and shutter Silicon Valley Bank (SVB) – a favorite financial partner for cloud startups – after a mass movement by customers to withdraw deposits caused a run on the bank.
State officials handed control of the situation off to the Federal Deposit Insurance Corporation (FDIC), which said in a press release all insured deposits from Silicon Valley Bank have been transferred to the Deposit Insurance National Bank of Santa Clara. These deposits will be accessible on Monday, March 13. However, it’s worth noting that the usual coverage limit for insured funds is $250,000. Those with higher account balances were instructed to contact the FDIC.
Silicon Valley Bank is part of SVB Financial Group, which also includes SVB Private, SVB Capital and SVB Securities. Silicon Valley Bank had approximately $209 billion in total assets and $175.4 billion in deposits as of the end of last year, the FDIC said.
"...uninsured deposits in U.S. offices that exceed the FDIC insurance limit were $151.5 billion..."
In its Q4 2022 10-K filing, SVB Financial Group said that "As of December 31, 2022...the amount of estimated uninsured deposits in U.S. offices that exceed the FDIC insurance limit were $151.5 billion." Another $13.9 billion in foreign deposits were not subject to "any U.S. federal or state deposit insurance regime." The FDIC said future payments will be made to uninsured depositors as it sells off SVB's assets.
The bank is the first FDIC-insured institution to fail this year as well as the first to close since 2020.
Beyond concerns about customers' ability to recoup their deposits beyond $250,000, some have also noted Silicon Valley Bank's failure could make it hard for some companies to make payroll. In some cases, that's because some payroll companies – like Rippling – processed payments through Silicon Valley Bank.
For it’s part, Rippling’s CEO said on Twitter the company will process payroll runs through JPMorgan Chase going forward and will have no exposure to SVB. However, payments which began processing earlier this week with SVB and were due to hit today will be temporarily delayed.
Silicon Valley Bank: No longer the partner of choice
SVB was the partner of choice for many tech startups, thanks to the bank's focus on serving emerging and early stage companies in the technology and healthcare markets.
SASE vendor Versa Networks, for instance, recently raised $120 million from Silicon Valley Bank and BlackRock. Silicon Valley Bank also provided credit facilities for networking company Arrcus in its recent $50 million funding round.
Versa and Arrcus could not immediately be reached for comment on how the bank’s failure might impact them.
But here’s what analysts told Silverlinings:
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“I don’t think it has any specific impact on the cloud industry. But the way I look at the cascading effect is a lot of the tech startups used this bank for their banking needs. If I got a $5 million round of funding, then I'd take the money and I'd put it in Silicon Valley Bank and I used that money for my R&D costs, meeting payroll, keeping the lights on....A lot of companies' money, the capital that they raised is gone. Which means that the VCs lose money that invested in those startups that parked their money in SVB and, of course, those tech startups with money that was parked in SVB – if they're not insured – are going to go under."
"It’s unclear to me how the VCs will be impacted as an outcome of this event and whether any future investments will be put on hold until they recover from the shock."
- Sid Nag, VP of Cloud Services and Technologies, Gartner Research -
“This is definitely a blow to the Silicon Valley machinery, because so many venture capital funds and startups use Silicon Valley Bank for banking as well as funding. It’s a sad moment in history for this well-known bank which has been a strong brand in technology markets for decades, but hopefully the regulators can provide a smooth transition with a minimal effect on the liquidity for their customers."
- Scott Raynovich, founder and principal analyst, Futuriom -
"This will have a massive ripple impact across the tech ecosystem and Silicon Valley private company artery. SVB is a foundational piece of the tech startup community and will have a constrained impact on funding for tech startups in cloud going forward. It’s a nightmare situation."
- Daniel Ives, managing director and senior equity analyst, Wedbush Securities -
"SVB has historically been a favorite of many recently-funded companies because VCs have a relationship with them...SVB has many startup customers that are now concerned about both temporary loss of liquidity and longer-term loss of funds. So yes, this event will definitely have negative impact pending uncertainty about how FDIC is going to unwind this. In terms of the reverse relationship, I don’t think this impacts other banks’ desire to take on startup customers. I’m actually hearing about influx of funds into other banks which I’m sure they will welcome."
- Roy Chua, founder and principal, AvidThink