The Silicon Valley Bank Debacle: How ‘the Goldman Sachs For Startups’ Ran Out of Money

A yearlong funding drought in the startup world eventually triggered a bank run at Silicon Valley Bank.

Silicon Valley Bank
Silicon Valley Bank shut down on March 10. SOPA Images/LightRocket via Gett

A little-known California bank is suddenly at the center of the largest banking failure in the U.S. since the 2008 financial crisis. Silicon Valley Bank (SIVBQ), a commercial bank mainly holding deposits for venture capital-backed startups, was taken over by the federal government today (March 10) after a bank run drained its cash reserve and a last-minute effort to raise capital failed.

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What is Silicon Valley Bank?

Silicon Valley Bank (SVB) is a regional bank based in Santa Clara, California, that takes deposits from and lends money to venture-backed startups and private equity firms. Though not a household name, it is among the 20 largest banks in the U.S., holding more than $212 billion in assets as of September 2022, according to the latest data available by the Federal Financial Institutions Examination Council, a federal inter-agency body.

Founded in 1982 by two former Wells Fargo bankers, Roger Smith and Bill Biggerstaff, and Robert Medearis, a Stanford University professor, SVB started out gathering deposits from venture-backed companies in Silicon Valley and later expanded into banking and financing venture capitalists. The bank provides liquidity through deposits and loans for nearly half all venture-backed startups in the U.S., according to its website.

“It’s like the Goldman Sachs for the startup industry,” said Angela Lee, a finance professor at Columbia University who teaches venture capital courses. “The reason everybody is talking about it is that if it can fail, any commercial bank can.”

A sudden bank run

SVB’s high exposure to the startup world made it vulnerable to the Federal Reserve’s tightened monetary policy. Since last year, rising interest rates and a sluggish market for public stock offerings have made it difficult for early-stage companies to raise capital, forcing many of them to withdraw large amounts of cash from their SVB accounts. The situation eventually devolved into a bank run this week, with several of the SVB’s largest clients pulling money out of the bank.

To prevent it from running out of money, SVB cashed out on a $21 billion bond portfolio on March 8 and wanted to move the money into shorter-duration bond assets with a higher return. However, rising interest rates in the past year have significantly devalued the bonds SVB held, and the timing of the sale made it worse.

“They were selling from a desperate position. It’s like you need cash to pay rent and you go to a pawn shop to sell your watch or necklace. You’ll likely have to sell below market price,” Lee said.

SVB disclosed yesterday (March 9) it recorded a $1.8 billion loss from the $21 billion bond sale. To cover the loss, SVB said it plans to raise $2 billion by issuing new securities, which would dilute the value of the stock held by its current shareholders. Shares of SVB Financial Group fell 60 percent yesterday and tumbled another 45 percent this morning before trading was halted.

The federal government takes over

Earlier today, SVB was reported to be in talks with a few banks to sell itself after the attempt to sell equity failed. But, by noon, federal banking regulators said they have assumed control of the bank, meaning it’s effectively shut down.

The Federal Deposit Insurance Corporation (FDIC), an agency providing deposit insurance to bank account holders in the U.S., has taken over about $175 billion of SVB’s customer deposits and created a new bank called  the National Bank of Santa Clara. The new bank will open on March 13 and continue to clear checks issued by the SVB, the FDIC said in an announcement today.

It’s unclear how many SVB’s clients will get their money back. The FDIC insurance only covers up to $250,000 in lost deposits. Amounts over that limit will depend on how much money the regulator is able to recover from SVB.

How notable investors react

The SVB crisis has triggered a selloff across the banking sector. The KBW Bank Index, which tracks the stock prices of major U.S. publicly traded banks, fell nearly 8 percent yesterday and posted its largest single-day loss in three years.

Notable investors worry the sudden downfall of Silicon Valley’s’ go-to bank would stifle growth in the U.S. startup ecosystem. “The failure of SVB Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash,” billionaire hedge fund manager Bill Ackman tweeted yesterday.

“It is possible today we found our Enron,” said Michael Burry, the “Big Short” hedge fund investor, in a now-deleted tweet yesterday, referring to the scandalous energy and commodities company that collapsed in 2001.

The Silicon Valley Bank Debacle: How ‘the Goldman Sachs For Startups’ Ran Out of Money