The Silicon Valley Bank fallout is just beginning

Following the collapse of Silicon Valley Bank last week, a lot of companies and entrepreneurs have been making the flight to — at least perceived — safety. That means the biggest banks have been getting more deposits: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo.

“Everyone is asking, ‘Where should we bank? Where is it safe to bank?’” Ryan Gilbert, founder of Launchpad Capital, told Silicon Valley Business Journal. “When you think you bank with the safest bank in your ecosystem, and they disappeared overnight, you realize it’s impossible to predict an earthquake.” He moved his account to Chase.

Startups such as Brex, Mercury, and Meow have also benefited. Brex specializes in corporate credit cards; Meow, in letting people earn interest on government bonds, among other services. (Meow also gives people accounts at BNY Mellon Pershing, another big bank.) “We’ve been flooded with inbounds, and we’ve been working nonstop,” Meow CEO Brandon Arvanaghi told me in a telephone interview. These aren’t just startups or customers from SVB, though that was the initial wave, he says.  

”Everyone’s starting to think about counterparty risk,” says Arvanaghi, which is the risk that someone you make an agreement with might not hold up their end of the bargain. If a bank fails, the FDIC isn’t obligated to make good on its loan agreements, for instance. In the case of SVB, the bank has also said it will honor its debt obligations — not a certainty a week ago! — and is even making new loans.

Some companies are putting capital in multiple banks as a way of hedging their bets. But that’s not exactly ideal, either. Banks tend to pay more attention to clients who keep a lot of money in their accounts, says Matt Cohen, a VC at Ripple Ventures in Toronto. Plus, it’s too hard to spread payroll across multiple accounts. 

The longer-term outcomes here are hard to sort out. SVB will probably be sold, either wholly or in parts, though probably not to a big bank. Cohen told me that he worries that the losers in all this will be regional banks and that when the dust settles, the big banks will just have gotten bigger.

What that means for the startup economy is unclear. Startups look different from other businesses because they generally burn capital — there’s usually a heavy injection of money when the account opens that gradually goes down. Mature companies, on the other hand, have more money coming in. And SVB was more willing to work with startups than most other banks. “We don’t know how many of the big banks want the business startups are bringing to them,” says Arjun Kapur, the co-founder of Forecast Labs. 

Kapur told me that he expects to see more caution in startups and more belt-tightening. Startups were already cutting costs in response to the weirdness that’s plagued the economy for the last year or so — it might make sense to expect companies to spend less money on marketing, among other things, until everyone knows what will actually happen. 

That may also mean more layoffs, says Tanner Hackett, the CEO of Counterpart Insurance, which offers insurance to small businesses. If businesses have a hard time raising new funding rounds or accessing new debt in the wave of SVB’s failure, there will be more urgency around finding a path to profitability, he told me. He expects to see businesses taking a conservative approach to managing their money.

Then there’s the question of the Federal Reserve. The Fed has been aggressively hiking interest rates to try to control inflation. The collapse of SVB, along with crypto banks Silvergate and Signature, may stop the Fed from continuing to crank up interest rates — or at least slow the speed at which the rates go up.

The Fed was also the supervisor for Silicon Valley Bank, a job where it seems to have failed, former Fed Governor Daniel Tarullo told Bloomberg. It’s not clear how much of what happened at SVB can be attributed to a 2018 rule change that loosened requirements for regional banks, though the Fed is investigating itself and will have a report out in May.

“We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm,” said Michael Barr, who will lead the review of the Fed’s actions, in a statement.

Meanwhile, the VCs are bickering. A statement from 600 VC firms called the bank run “deeply disappointing” and encouraged portfolio companies to resume banking with SVB.

Peter Thiel’s Founders Fund notoriously told its companies to pull their money, and though it wasn’t the only firm that encouraged withdrawals, Founders Fund partner Trae Stephens appeared to confirm that the group was a key influence in the bank run. There are also rumors swirling that Thiel deliberately bet against SVB. That’s probably why someone at Founders Fund hit up Axios for damage control: someone — can’t imagine who! — wanted everyone to know that Thiel wasn’t part of that decision.

Anyway, the blame game is continuing apace since it wasn’t just Founders Fund who stabbed SVB. “Further speculation has it that both Sequoia and a16z then followed Thiel’s lead and urged their portfolio companies to get their money the heck out of SVB,” wrote William Cohan in Puck. “There have also been reports that as early as December, Fred Wilson, the dean of New York’s venture capital industry, at Union Square Ventures, began telling its portfolio companies to flee SVB.”

The instability may not be over. Now Credit Suisse is looking shaky — and while it’s not a financial institution that is as concentrated on the tech world as SVB was, it’s big enough to make waves throughout the world of money. Switzerland’s central bank has stepped in to say it will provide liquidity if necessary, but nerves seem to be raw in the banking world, generally. One problem with bank runs? They can beget more bank runs.

“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,” said Brad Svrluga, a seed investor, on Twitter. “The ultimate failure was from the hysterical urging on social media of VCs who undermined our shared ecosystem. It has been a stunning failure of leadership.”