It has been a nerve-wrecking week for startup founders who had accounts with Silicon Valley Bank (SVB). After the regional bank’s sudden failure March 10, many founders pulled their company funds out and moved them to other banks, some only to find themselves caught up in another a bank run as SVB’s aftershock spread.
Lauren Wang, the founder and CEO of the Flex Company, a Los Angeles-based startup making feminine hygiene products, was one of the SVB clients who missed the last window to withdraw their money before the bank permanently shut down.
Wang was at a natural products conference near Los Angeles on March 9 when she began receiving frantic text messages from fellow CEO friends about a bank run at SVB. “I literally got chills all over my body,” she said. “I called my CFO and said we should move our money out.” They initiated a wire transfer at around 3:00 p.m. that day but it was already too late.
The next day, SVB was shut down by federal banking regulators. Scrambling to pay her employees the next Monday, Wang and her husband on took their two infant children to a JPMorgan Chase bank near their home in Los Angeles and transferred half of their life savings to a new business account. Wang also opened a company account with First Republic, a San Francisco-based regional bank, after reviewing its balance sheet to make sure its assets weren’t as risky as what had brought down SVB.
Her relief proved short lived, as First Republic also faced a bank run.
Why startup founders chose regional banks
Like many startup founders, Wang chose a regional bank instead of a larger institution when she first launched her company. Often, founders don’t have much choice.
“It’s surprisingly challenging for a new startup to get a business account set up at a larger bank,” said Roger Lee, an entrepreneur based in San Francisco and the CEO of Comprehensive, a compensation management platform. “It often requires visiting a branch in person, waiting for hours, and producing mounds of verification documents.”
Lee didn’t have a business account with SVB. But, alarmed by systemic risks spreading across regional banks, he tried opening a business account with JPMorgan Chase online. “It got automatically closed on Monday without any warning or notification,” Lee said. “When I called Chase, they told me I had to visit a local branch and re-start the process from scratch.”
Before its shutdown, Silicon Valley Bank held deposits for and lent money to about half of all venture capital-backed startups in the U.S., according to its website.
“If you are a founder with an early-stage company and have no venture capital backing, the only bank that will open a business account for you is SVB,” said Wang. “SVB was a lifeline for me and many entrepreneurs like me who weren’t well connected and didn’t have a lot of money when starting out.”
Systemic Risks spook SVB clients who moved to other regional banks
Wang recovered her business funds at SVB on March 13 from the Silicon Valley Bridge Bank, a new bank created by the Federal Deposit Insurance Corporation (FDIC) after taking over SVB’s assets last week.
Many founders she knew also turned to First Republic over the weekend, Wang said. But before they could relax, rumors began to circulate about First Republic’s financial health. Like SVB, the majority of First Republic’s accounts are uninsured, meaning depositors could lose all of their savings in the event of a bankruptcy.
“First Republic was overwhelmed with account opening requests on Friday and over the weekend. But by Monday, everyone was spooked by First Republic rumors, and founders in group chats saying they were pulling their money out and other founders standing up for First Republic urging calm,” Wang said.
As SVB’s aftermath rattled the banking sector, shares of First Republic fell 60 percent March 13 before trading was halted. After a brief rebound the following day, its crash continued and closed today at $23, down 80 percent from a week ago.
It appears the bank has averted the crisis for now. Yesterday, a group of 11 large banks agreed to deposit a total of $30 billion at First Republic to bolster its cash needs.
Following the First Republic scare, Wang said she has moved all her business funds to the newly created Chase account. Lee said most founders he knows have either moved to large banks like Chase or a startup bank, such as Mercury and Rho, because their account opening process is digital and faster.