Silicon Valley Bank’s Abrupt Closure Leaves Venture Capitalists And Founders Scrambling

Investors told Forbes they’re now focused on damage control such as ensuring portfolio startups can make payroll with the bank’s uninsured deposits now frozen.

This is a developing story that will keep receiving updates. Last updated 3/10 at 6pm.

On Friday, Silicon Valley Bank’s rich 40-year history came to an abrupt, ignominious end as regulators closed the bank and appointed the Federal Deposit Insurance Corporation as its receiver. And for the startups and investors that SVB has financed and served as a bank – spanning the entire venture capital-backed ecosystem – it’s raised new questions about when deposits and financing will be returned, if at all.

For the U.S. startup ecosystem, the news is an end-of-an-era moment that follows several days of frenzied communications and speculation that played out over Twitter, firm emails to founders, and investor and entrepreneur group chats. In talks with more than 10 venture capital investors on Thursday and Friday, Forbes heard of a chaotic scene in the past several days since SVB revealed its financial concerns and proposed a plan of action on Wednesday that spooked many in the industry. (A call by SVB CEO Greg Becker with some firms on Thursday telling them to “stay calm,” meanwhile, was said to have had the opposite effect.) Some firms, and their investors, began urging their startups to withdraw their funds from the bank. Others took to Twitter in an attempt to forestall the bank run that was building momentum, an attempt of solidarity that came up short.

For some, especially managers of newer, smaller funds, the shutdown news has hit hard. “I’m completely frozen,” one manager said. “Everyone here is mentally and physically exhausted. Yesterday was surreal. And there’s a sense that this was the last thing that founders needed.”

Many founders and VCs said that, to their knowledge, attempts to withdraw capital from SVB Wednesday and through Thursday afternoon had gone smoothly. Others, who attempted to withdraw in the evening and into Friday, however, were unclear as of lunchtime Friday whether they’d get their funds anytime soon.

A request for comment to an SVB spokesperson and an external PR representative was not immediately answered.

In a press release, the California Department of Financial Protection and Innovation said that insured depositors “will have full access to their insured deposits no later than Monday morning, March 13, 2023.” Uninsured depositors – and more than 93% of the bank’s $161 billion in deposits were uninsured – were told they would get a receivership certificate for their remaining funds, to be paid out in future dividend payments as the FDIC sold off SVB’s assets.

In a LinkedIn post, Glen Water, head of early stage practice for Europe and the Middle East and Africa at SVB, wrote that Silicon Valley Bank UK had confirmed on Friday that it was a standalone, UK-regulated bank and was not immediately affected by the FDIC’s move.

Founders, meanwhile, compared notes on their ability to withdraw funds over Signal and Telegram groups.

The biggest question for investors and founders now, several firm leaders said: Startups making payroll next week. Some startups that banked with SVB will need to pay employees as soon as Tuesday, one noted; board directors (who are frequently VCs who’ve backed the company) also carry liability for their companies to do so. One payroll provider, Rippling, emailed customers that action was needed to maintain use of their account as Rippling moved off SVB to JPMorgan Chase, per an email tweeted by founder Kevin Yun.

In a response thread, Rippling CEO Parker Conrad tweeted that the configuration change was for customers whose pay runs had been initiated earlier in the week.

“If you’re a startup with money in other accounts, your focus today and Monday is getting your payroll provider to draw from those accounts. If you don’t have that money available, you pray this gets resolved this weekend,” one VC said.

Update: At least one VC firm has committed to backstop its portfolio in making payroll. Lowercarbon Capital partner Clay Dumas wrote the climate-focused firm’s CEOs on Friday afternoon asking founders unable to make payroll in the next two weeks to respond with the cash they needed and payroll date. Failing other solutions, Lowercarbon said it will “directly front” the cash needed for its startups, according to the email.

“We’re glad our Lowercarbon portfolio payrolls are covered, now other investors need to step up and do the same,” firm cofounder Chris Sacca told Forbes on Friday night. “Turns out your fucking tweet storms don’t pay founders and employees.”

For those unacquainted with how the startup ecosystem raises and holds capital, SVB’s reach might be hard to appreciate. Many funds, from the large well-known ones to new, emerging funds, kept their own cash raised with the bank; their partners often used SVB for their own banking, too, or for mortgages. Startups, meanwhile, kept much or all of the money they in turn had raised and called from investors with SVB.

Others in the industry are sorting out a number of questions, from what this means for cryptocurrency startups with a mix of cash and tokens, to SVB’s role in sponsoring and hosting various events and development programs for the industry. Investors and founders personally know SVB employees, too — many of them former VCs and founders themselves — adding a “very real personal and cultural” layer to the fallout, said one emerging fund manager.

“SVB completely fucked this up.”

Prior to Friday’s shutdown announcement, VCs had scrambled for information alongside their entrepreneurs and the general public in group emails, calls and chats. “No one has had good info,” the leader of another VC firm told Forbes. Founders, meanwhile, compared notes on their ability to withdraw funds over Signal and Telegram groups.

Investors at several firms that had urged their founders to withdraw their funds prior to Friday – a group reported to include Union Square Ventures, Coatue, Founders Fund and others – told Forbes they did so out of “an abundance of caution.” “I think the funds will be totally fine at the end of the day,” said one. But companies that needed their cash with SVB urgently – for, say, an acquisition, or another major expenditure – could find themselves inconvenienced as the dust settles, the investor said, adding they hoped the bank would be sold quickly to get funds flowing again in short order.

Update: Some investors have argued that such warnings – and the subsequent outflows from the bank – precipitated SVB’s perhaps otherwise-avoidable collapse. “I’d like to formally thank my peers in the venture community whose stellar leadership over the past 48 hours triggered a run on deposits at Silicon Valley Bank, ultimately toppling one of the most important institutions in our ecosystem,” Primary Venture Partners cofounder Brad Svrluga wrote on LinkedIn on Friday, noting that SVB “made some big mistakes” but adding that “the ultimate failure was from the hysterical urging on social media of VCs who undermined our shared ecosystem.”

But the leader of another firm, which had advised founders to make withdrawals if they could, argued that SVB alone should bear responsibility. “It’s the company’s job to convince the market that there shouldn’t be a panic. SVB completely fucked this up. They decided to take all these losses without a financing solution in place, and now they’re blaming the market,” they said. “You don’t blame the consumer for taking money out of the bank.”

Of course, for others in Silicon Valley, the loss means opportunity. On Twitter, the CEOs of Brex and Mercury, among others, have been sharing info on their own alternative products – a fast pivot, for Brex CEO Henrique Dubugras, from talking about his company’s AI integrations on Tuesday, already the distant past. At Mercury, CEO Immad Akhund tweeted that his “DM + emails are going a little crazy” and shared a link to a priority onboarding page to help startups open a bank account. (Akhund later tweeted in support of SVB, saying “hope they make it to the other side.”)

Another startup, Trace Finance, claimed on Friday that withdrawals from SVB totaling $200 million had been initiated through its service in the past day alone, with $100 million already deposited into Trace checking accounts. Trace only launched checking accounts as an offering yesterday, moving up its launch date following the news.

Brex, Mercury and others are, of course, backed by venture capital. But their investors weren’t taking any victory laps on Friday – too busy working the phones and email advising their other portfolio companies on everything from significant acquisitions whose funds are now on ice to next week’s payroll checks.

This is a developing story that will keep receiving updates. Last updated 3/10 at 6pm.