The SVB Collapse & It's Detonation of Banking Services for Tech Companies

The tough times continue to roll on and our world economies are consistently staying down. As Silicon Valley Bank is now the latest notable bank to collapse. Other banks that have collapsed this year are Silvergate Bank and Signature Bank. All three of these banks collapsed in the month of March!

Today though, I'll be giving you the inside scoop on the cause of the collapse of Silicon Valley Bank that has sent shockwaves all over the tech industry.  We’ll dive into what Silicon Valley Bank is, how the collapse happened, its importance to tech companies and impact of the collapse on tech companies and what the collapse means for future startups.

What is Silicon Valley Bank?

Silicon Valley Bank was a state-chartered commercial bank based in Santa Monica, California. Founded in 1983 by Bill Biggerstaff, Robert Medearis and Robert V. Smith, the bank had a nearly four-decade run before its collapse on March 10th, 2023. It was the 16th largest bank in the USA, referred to as the tech industry's largest lender as it provided banking services to almost half of all the U.S. venture-backed technology and life science companies. 

How did Silicon Valley Bank Collapse?

Startups and tech firms made sizable profits during the pandemic, and some of those earnings were deposited in the Silicon Valley Bank. With an abundance of cash, the bank did what banks do: it kept a portion on hand and invested the rest, placing a sizable portion into long-dated Treasury bonds that promised favourable returns during periods of low-interest rates.

The Fed then increased interest rates from close to zero to over 4.5%, beginning a little more than a year ago. There were two outcomes as a consequence. Because newer bonds earned higher interest rates, the Silicon Valley Bank's holdings of Treasury bonds lost all of their value. Additionally, as interest rates increased, venture funds had to pay more to borrow money, which resulted in a slowdown in the flow of venture capital financing to startup and tech businesses. As a consequence, in order to cover their payrolls and other expenses, these startup and tech companies had to withdraw more money from the bank. But there wasn't enough cash on hand at the bank.

Importance to Tech Companies & Impact of Collapse 

In terms of importance to tech companies more than 2,500 venture capital firms, including Lightspeed, Bain Capital, and Insight Partners, used Silicon Valley Bank as their bank. It was a consistent sponsor of Silicon Valley tech conferences, parties, dinners, and media outlets while managing the personal wealth of numerous industry professionals. In terms of impact, major companies such as Roku, Circle, Pinterest and more were affected by the collapse. 

Roku had about $487 million of its $1.9 billion at Silicon Valley Bank, about 26 per cent of the firm’s cash as of Friday March 10th. Circle, a payment-technology firm tweeted out on its Twitter social media page that $3.3 billion of its $40 billion USD Coin (USDC) cryptocurrency reserves remained at Silicon Valley Bank. Pinterest, a social media company known for sharing photos and videos on its platform saw a 5% drop in stocks on the Monday of March 13th from the 10th of March the day of the collapse before gradually recovering to close the day 2 percent lower.

What does it mean for Future Startups?

So far, the collapse had caused an increased amount of uncertainty in the start-up community, founders are now concerned with making payroll, getting their money out, and covering running costs. Investors should think about providing "emergency cash to your startups that need it for payroll or whatever," according to Sam Altman, the CEO of Open Ai and previous head of startup accelerator Y Combinator.

Increased interest rates have reduced the easy access to cash that supported soaring startup valuations and funded ambitious, loss-making projects. According to CBInsights statistics published in January, venture funding in the United States declined 37% in 2022 compared to the previous year. Future Tech Startups will have to now look to acquire funding from Angel Investors, Venture Capital Firms, their governments or other connections.

Conclusion

That winds up my discussion about the Silicon Valley Bank Collapse. Hope you enjoyed it! Feel free to leave a comment below. See you next time.