Silicon Valley Bank’s financial stability worries investors

SAN FRANCISCO — Panic gripped the startup industry Thursday as investors at some venture capital firms urged portfolio companies to move their money out of Silicon Valley Bank amid concerns about the high-tech industry’s financial stability.

Silicon Valley Bank’s spiral began after its surprise announcement Wednesday that it would take extraordinary and immediate steps to shore up its finances amid a worsening economic environment for startups and other technology companies that dominate its customer base. The bank said it sold $21 billion of its most liquid, easily marketable investments; borrowed $15 billion; and organized an emergency sale of its stock to raise money.

Banks don’t like to take any one of these steps — let alone all three at once — and when they do, the choreography is usually carefully crafted. Shares of Silicon Valley Bank plummeted 60% on Thursday as investors rushed to sell shares after the announcement.

A representative of the bank did not respond to a request for comment.

If Silicon Valley Bank were to fail, it would be the second-largest such bankruptcy in US history, dwarfing the raid on Washington Mutual during the 2008 financial crisis, when the bank had about $300 billion in customer deposits. At the end of last year, Silicon Valley Bank reported $212 billion in client assets.

The bank’s decline dragged down the share prices of its peers as concerns arose that others could face similar problems. First Republic Bank in California fell 16.5%, Signature Bank in New York was down more than 12% and Zions Bancorporation was down 11.4%.

Larger banks also suffered. Bank of America and Wells Fargo were down 6.2%, while JPMorgan Chase was down 5.4%. The KBW banking index, which tracks shares of 24 major banks, fell nearly 8%, its worst one-day move since June 2020 in the early stages of the coronavirus crisis.

Greg Becker, CEO of Silicon Valley Bank, urged venture capital firms to remain calm during a conference call Thursday.

But a number of investors, including Tribe Capital investor Arjun Sethi, advised the companies to move some or all of their money out of the bank. “Almost by definition, any bank with a business model is dead if everyone moves,” Sethi wrote to Tribe Capital’s founders in a note. Other firms have made similar moves, according to four memos reviewed by The New York Times.

Founded in 1983, Silicon Valley Bank is small compared to Wall Street banks, but it looms large among tech startups. It calls itself “the financial partner of the innovation economy”. In addition to other startup banking services, it is known for providing them with loans and private wealth management for tech workers.

Some startup investors took to Twitter to predict that the bank would have to be sold or bailed out. Others gave premature eulogies, praising the bank for being a good partner over the years.

Many tried to calm down. Mark Suster, an investor at Upfront Ventures, wrote that he believes the only financial risk to Silicon Valley Bank’s customers is a bank run.

“Think how many companies would be destroyed overnight if SVB went bankrupt,” he said in an interview. “It would be catastrophic and people shouldn’t make fun of it.”

Willy Ilchev, an investor at Two Sigma Ventures, urged the industry to “support” the bank by not withdrawing money. Rosanne Vinczek, an investor at Renegade Partners, wrote that a panic-driven bank run would be “self-sustaining” for the industry.

“There are two things in life that only exist if you believe in them: God and bank runs,” said Anshu Sharma, CEO of Skyflow, a data privacy startup. He is also an investor in 65 other startups, and he urged his portfolio companies to sit tight.

Sunny Juneja, founder of Canopy Analytics, a Bay Area real estate technology startup, said he tried to withdraw his startup’s money — several million dollars — from Silicon Valley Bank after his advisers and investors told him to do so on Thursday. , but the bank’s online portal was not working. All day he tried to open an account in another bank.

“I’m doing everything I can as soon as possible to make it happen,” Juneya said. He said he felt bad because Silicon Valley Bank had been a good partner, but he saw no upside to staying with it amid the panic and no downside to leaving.

Silicon Valley Bank’s chief executive wrote in a note sent to clients Thursday and seen by the Times that it was a “tough day” but that the bank “was actually pretty healthy, and it’s very disappointing to see so many smart investors chirping otherwise.” .”

Like all of its peers, and in accordance with regulations, Silicon Valley Bank keeps only a small portion of its customers’ deposits in cash available for immediate withdrawal. The vast majority are either loaned to other customers or invested to make a profit. This raises the specter that hasty withdrawals won’t allow you to pay.

The most immediate way to prevent a crisis is to convince customers not to withdraw their funds. In a letter to clients on Wednesday, Becker said the bank was “financially positioned to withstand sustained market pressure.” The letter, however, noted that customer deposits were lower than forecast in February and no withdrawals had been considered since then.

After Becker’s letter, Moody’s downgraded the bank’s bond rating and lowered its outlook from stable to negative. “Moody’s does not expect the environment to recover enough for SVB to significantly improve its profitability, funding and liquidity,” it said.

The Federal Reserve Bank of St. Louis warned last month that as interest rates rose, the value of banks’ investment assets fell, and those losses then eroded banks’ capital.

Some startups quickly decided to capitalize on Silicon Valley Bank’s difficulties. The head of a much smaller rival, Levro, sent a memo to potential customers saying there was an “expedited processing/approval process” for current SVB customers.

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