SVB Takes a Tumble 🏦💥
Hey everyone! While we’d love to give you a quick recap of our recent travels to London, Lisbon, and Peru (which we still plan to do soon!), we were quickly brought back to earth by one institution - Silicon Valley Bank (SVB). If you missed the news of the second largest banking failure in US history, don’t worry - we got you!
This week we’re going to review what happened with SVB. And in classic W3FTC fashion, we’ll also talk about how a bank failure like this relates to the world of Web3 and crypto.
And if you are a startup, investor, or employee impacted by these recent financial events, our thoughts are with you as you navigate this difficult time ♥️
Let’s get into it.
So, what is SVB and why is everyone talking about it?
As we mentioned above, SVB stands for Silicon Valley Bank. Depending on what industry you’re in, you may or may not have heard of it prior to this week, but SVB was a regional bank based out of California that mainly catered towards tech companies, VC firms, and start-ups. It was honestly like the cool and innovative younger cousin of the Bank of America and Chase banks of the world–and for good reason! A quick look at their website shares all of the facts needed to know that SVB was the backbone of the tech ecosystem:
We know what you’re thinking…
How does a bank with such a great track record of trust and success in the tech ecosystem practically implode overnight?!
The short answer is that this was caused by a bank run–when clients of the bank start to panic that their money is at risk and everyone tries to pull their money out of the bank all at once.
But wait, shouldn’t people who deposit their hard earned money in a bank be able to access it whenever they want?
Banks make money by taking the deposits from their clients and investing them in safe securities, such as bonds. SVB was one of the most trusted and respected banks for the tech ecosystem, they received tons of deposits from well-funded start-ups over the past decade which meant they had lots of cash to invest. This is common practice and is usually a sure fire way to generate returns for the bank because they know that it’s pretty rare for all of their clients to ask for their deposits back at the same time. However, because of the macroeconomic environment, start-ups had been more likely to ask for their deposits back so that they could use the cash for the operations of their businesses.
This put SVB in a tough situation where they needed more cash than they actually had on hand, so they really only had two options that they executed in tandem:
Sell some of their bonds: SVB ended up selling $20 billion dollar worth of bonds for a $2 billion dollar loss. Yes, $2 billion.
Fundraise: They ended up raising $2.25 billion dollars and offering $1.25 billion of convertible preferred and common stock to investors.
At this point, the fire alarms are going off among clients. This led to some serious panic among clients who were unsure if they’d be able to access their money. Major VC firms began advising their portfolio companies to withdraw their money ASAP because of liquidity concerns that SVB was facing. It ultimately caused a quick downward spiral because once people got a whiff that everyone else was withdrawing money from SVB out of fear, they did the same. No one wants to take the risk of having their money left in a bank where they can’t access it.
So what happened next?
Regulators shut down the bank on Friday morning with the swiftness. This left the tech community in a state of disarray as everyone tried to figure out what this meant for them. Founders, especially those in the early stages, who banked with SVB were left wondering if they would have enough cash to make payroll for their teams or even continue operating their businesses. Imagine you’ve spent years bootstrapping and investing in your business just to practically lose everything overnight because of something beyond your control. It makes us realize the faults of centralization and how one entity collapsing had the potential to ruin the livelihood of people looking to innovate and make the world a better place.
Who else got hurt?
In piecing the situation together, you probably noticed that a lot of different stakeholders are involved. Aside from founders, it’s only right that we think about some others who were impacted too:
“How bad is it?” said Investors (angels, venture capitalists, and growth/private equity firms)
Money from investors helps startups operate on the day-to-day. But when the news of SVB hit, investors scrambled to ask their portfolio companies a question they hadn’t even thought to ask before: “Who do you bank with?” And as you saw from above, for a lot of them it was SVB.
But that’s not all. As of the end of 2022, 56% of its loans (as of the end of 2022) were actually to VC and private equity firms, secured by their limited partner commitments.
So investors spent the weekend trying to see how bad their exposure was (aka how much money did they have in SVB directly or through startups). Investing is also a two way street, so a lot of startups also reached out to their investors for guidance, which either led to a lot of nerve-calming phone calls and texts to help founders or flooding your social media feed with tweets and post sharing how they have helped their PortCos (VCs love twitter)
“Why are our customers taking out money?” said small, regional banks all over the US.
While the focus is on SVB, other small regional banks across the US were impacted. The bank run at SVB had ripple effects, triggering other small businesses that banked their money with other smaller, regional banks, not even associated with SVB, ALSO started to pull their money out. To some, even the remote thought of 2008 was terrifying.
“Do I still have a job?” said employee(s) of Silicon Valley Bank
Sadly, no. The bank was quickly shut down by regulators over the weekend, impacting over 8,500 employees worldwide. On the bright side for the employees, many were reportedly paid their bonuses shortly before the Federal Deposit Insurance Corporation (FDIC) came in, and some are even making money selling company merch on eBay.
“It’s not our problem.” said Janet Yellen (aka the Federal Reserve Bank)
Early on Sunday, Janet Yellen, Chairwoman of the US Federal Reserve Bank said that while they are concerned about the impact to depositors, the Fed would not be bailing out SVB, like they did during the 2008 Financial Crisis. She did note that regulators like the US Treasury and FDIC were working closely to ensure people and businesses with money in the failed bank would be made whole.
And a lot happened in the matter of 24 hours.
Startups live to see another day
That same evening, after failing to find a buyer for SVB, the Treasury Department, the Fed, and the FDIC took a key step: they told depositors with more than $250,000 parked in SVB accounts (the federal insurance limit) that they'll have access to their cash on Monday morning. Where is the money coming from? Money that would come from the fees banks pay into the Deposit Insurance Fund. That’s right, not your taxes!
“We’ll buy the UK Arm for £1” said HSBC UK
Yes, you read that correctly: single One British Pound. On Monday morning, HSBC UK, the British-arm of one of the world's largest financial services organizations, paid £1 (~$1.21) to acquire SVB U.K. (excluding the assets and liabilities of the parent company). This is an interesting move by HSBC who pulled all of their assets out of the US in 2021 to focus on their Asian operations.
As for everything else, honestly the situation is changing day by day.
What does this mean for you?
We know that we’ve spent a lot of time briefing you on what happened, but it’s important to us that we all understand how significant the magnitude of the second largest bank failure ever is, and what this means for us moving forward. Here are three web3 related observations we see as a result of the SVB bank failure:
Decentralized Finance: Last April, we wrote a post on Decentralized Finance (DeFi), which many web3 enthusiasts believe to be the future of finance. There is a role for decentralized finance, especially as we realize the power that centralized financial systems hold, because it prevents situations like this from happening. SVB was a centralized institution, and we see what happens when a centralized institution goes down… it takes everyone along with it (even if only temporarily).
Crypto Wallets: As we reflect on the past 6 months in the crypto world, another shocking event was the FTX fiasco. We should note that FTX was an exchange and a lot of crypto companies may have had their funds in an FTX account, but it wasn’t a bank. This is why wallets are important, because if you store your crypto/digital assets in a cold wallet or a super secure hot wallet, then you have full control over them. If you keep your money in an exchange it may not be fully decentralized and runs the risk of pulling an FTX or SVB.
Consumers as a Priority: What would have happened if there was no bailout for SVB? First debtors would be given their money, then shareholders, then the consumers (aka the startups). In web3, consumers are prioritized first, and wouldn’t have been left short changed. There is a huge opportunity here to ensure that what almost happened with SVB does not happen again by using web3 principles.
As always, if you made it to the end of this post, you’re a real one! We hope you found this overview and our thoughts helpful.
– Kendall & Chad