SVB shutdown sends shockwaves through Silicon Valley as CEOs race to make payroll

By Greg Bensinger, Anna Tong, Krystal Hu and Jeffrey Dastin

(Reuters) -The sudden collapse of Silicon Valley Bank on Friday sent shockwaves through the startup community, which has come to view the lender as a source of reliable capital and deposit partner, particularly for some of tech’s biggest moonshots.

On Friday, tech CEOs scrambled to make payroll after SVB Financial Group was shuttered by California banking regulators in a bid to protect depositors following a dive in the value of its investment holdings and a rush of withdrawal requests starting just two days ago.

The bank was seeking a sale, sources told Reuters, and trading in its shares was halted after they plummeted 60% late Thursday.

Startups with money held at Silicon Valley Bank raced to come up with plans to pay workers after hearing their funds would be locked up over the weekend, said Jai Das, president at Sapphire Ventures, whose investments have included Box and LinkedIn.

“Some of the folks have moved their money out of SVB to other banks,” he said. “Hearing CEOs who are figuring out ways to use their own capital or own funds to fund some of the payroll.”

VC investors are discussing solutions for startups that have funds stuck with SVB and struggling to process payroll to employees and vendors, including offering a line of credit to portfolio companies.

“That’s the number one conversation and the one thing people can actually do something about right now,” said Pegah Ebrahimi, Managing Partner at FPV Ventures. “I think institutions, VCs, and banks have to come together to solve this short-term liquidity squeeze and help otherwise resilient companies have access to funds to make payroll.”

Dean Nelson, CEO of Cato Digital, was on a line outside of SVB’s Santa Clara headquarters, hoping to get answers. He said he was worried about the company’s ability to pay employees and cover expenses.

“Access to the cash is the biggest problem for the majority of the companies here. If you’re a startup, cash is king. The cash and the workflow, to be able to have the runway is critical.”

At some Silicon Valley Bank branch locations in California, depositors gathered early Friday to attempt to get their cash out, fearing it could be inaccessible in the coming days. And at some sites the doors were locked and cursory notes were found advising customers to try elsewhere.

At a Menlo Park, California, branch, customers were greeted by a taped up press release apprising them the bank had moved into receivership and would be known as Deposit Insurance National Bank of Santa Clara.

The bank has been central to the formation of many early stage companies due to its reputation for taking bets on startups that may have had little chance of survival otherwise and for which larger banks may find far too risky. It has had financial relationships with a who’s who of Silicon Valley firms over the years, including Snapchat’s parent Snap Inc (NYSE:).

The full extent of the fallout from the bank’s crash could take weeks or months to gauge and might presage a period of more cautious investing in technology startups.

A Silicon Valley Bank spokeswoman didn’t immediately respond to a request for comment sent Friday.

The FDIC said Friday that insured depositors will regain access to their deposits no later than Monday, when branches reopen under the control of the regulator.

‘HEART STOPPED’

The speed of the bank’s precipitous decline caught the startup community by surprise.

Ashley Tyrner, CEO of startup FarmboxRx, was on vacation with her family in Costa Rica Thursday afternoon when she said she started getting frantic text messages from her chief operating officer, who had initiated an eight-figure wire transfer, completely emptying their Silicon Valley Bank account.

Tyrner said she wondered if her co-founder had gone mad. “She’s just pinging me over and over and texting my kid,” Tyrner said in an interview. “‘SVB is going under,'” her partner texted, said Tyrner. “‘We have to get our funds out, please approve this wire.'”

Tyrner was thwarted when she discovered the bank’s website wasn’t working. “My heart stopped,” she said. As of Friday, FarmboxRx’s funds were still tied up with Silicon Valley Bank.

“‘My bank is going to go under’ had never crossed my mind,” she said.

The fate of Silicon Valley Bank cast new doubts on the funding environment just as some bright spots were emerging, particularly for artificial intelligence startups, amid the grim fallout of 2022 that led many technology companies to trim jobs and pare back spending on riskier projects.

Brex, another fintech startup, said it is offering an emergency bridge credit line to startup customers to support payroll and other operational spending needs in light of the situation.

Arjun Sethi, a co-founder of venture firm Tribe Capital, sent a sobering note to clients Friday that he shared on social media. “The venture ecosystem is wandering in the desert. Liquidity is dry,” he wrote. “Hold your assets in the most liquid traditional banks, and do not take unnecessary risks.”