How the Silicon Valley Bank Collapse Shook the Start-up World?

Silicon Valley Bank (SVB) was one of the most prominent lenders in the start-up ecosystem, providing banking services, loans, credit cards, and venture debt to thousands of tech companies and investors. On March 10, 2023, SVB collapsed after a bank run, marking the second-largest bank failure in United States history and the largest since the 2008 financial crisis.

The collapse of SVB sent shockwaves across the tech industry, as many start-ups and venture capitalists faced uncertainty over their deposits, loans, investments, and cash flow. The Federal Deposit Insurance Corporation (FDIC) stepped in to allay fears and limit risk in the broader financial system. Here is a summary of what happened and what lies ahead for the start-up ecosystem after SVB.

What caused SVB's collapse?

According to reports, SVB's collapse was triggered by a series of events that eroded its capital base and liquidity position. These include:

- A massive fraud scandal involving one of its largest clients, Theranos, which was accused of falsifying blood test results and defrauding investors of billions of dollars. SVB had lent Theranos over $500 million and was exposed to significant losses when Theranos filed for bankruptcy in February 2023.

- A surge in loan defaults and delinquencies from start-ups that were hit hard by the Covid-19 pandemic and its aftermath. Many start-ups struggled to survive or pivoted to new business models that required less capital. SVB had a high concentration of loans to early-stage companies that were deemed risky by regulators.

- A decline in venture capital activity and valuations due to market volatility and regulatory scrutiny. Many start-ups faced difficulties raising funds or exiting through IPOs or acquisitions. SVB relied heavily on fees from facilitating venture capital transactions and providing equity financing to start-ups.

- A loss of confidence from depositors who withdrew their money en masse after rumors circulated about SVB's financial troubles. As a result, SVB faced a liquidity crunch that prevented it from meeting its obligations.

What did FDIC do?

The FDIC seized SVB's assets on March 10 and announced that it would sell them to another bank within 90 days. The FDIC also assured depositors that their money was safe up to $250,000 per account under its insurance scheme. However, some depositors who had more than $250,000 or held accounts with foreign branches of SVB were not covered by FDIC insurance.

The FDIC also said that it would honor existing loan contracts with borrowers but warned them to expect changes in terms or rates once a new buyer took over. The FDIC also said that it would work with other regulators and stakeholders to ensure an orderly transition for customers.

What are the implications for start-ups?

The collapse of SVB has left many start-ups scrambling for alternative sources of funding and banking services. Some start-ups have reported delays or disruptions in receiving payments from customers or investors who used SVB as their intermediary. Others have faced challenges in accessing their accounts or transferring funds out of SVB.

Some start-ups have also seen their credit lines reduced or revoked by other lenders who are wary of lending to tech companies after SVB's failure. Some start-ups have also lost access to venture debt financing from SVB which helped them bridge funding gaps or extend their runway.

On the positive side, some start-ups have benefited from lower interest rates or better terms offered by other banks who are competing for their business after SVB's collapse. Some start-ups have also received support from their existing investors who have stepped up with additional funding or advice.

What are the implications for venture capitalists?

The collapse of SVB has also affected venture capitalists who used SVB as their banking partner for managing their funds and investing in start-ups. Some venture capitalists have reported difficulties in wiring money to portfolio companies or receiving distributions from exits. Others have faced challenges in accessing their accounts or moving funds out of SVB.

Some venture capitalists have also seen their returns diminished by losses on equity investments made through SVB which may be written off or sold at a discount by FDIC. Some venture capitalists have also lost access to leverage facilities provided by SVB which helped them amplify their returns.