When Silicon Valley Bank was gripped by crisis last Thursday, General Catalyst chief Hemant Taneja assembled a group of venture capitalists in a last-ditch effort to avert disaster.
Over a few days before, some VC funds have leaned on portfolio companies to withdraw from the favorite bank of the technology scene, with Peter Thiel’s Founder of the most significant Fund to do so, according to people who know the situation. The founder of the Fund declined to comment.
“What people don’t consider is, if everyone does it, you’re going to make the bank unviable,” Taneja said. “By the time I organized the business community to have a calm and consistent approach, it was too late: the FDIC [Federal Deposit Insurance Corporation] already within the four walls of SVB,” he said.
The immediate crisis for VCs and tech startups appears to have passed, after the Federal Reserve announced emergency measures to support depositors and strengthen the banking system on Sunday afternoon.
Relief has made way for a round of bitter recriminations, as VCs contemplate a reckoning: by abandoning a bank that has long been a reliable partner, they have helped to create a gaping hole in the heart of Silicon Valley.
The bank is the center of technology venture capitalists’ operations – taking deposits, writing loans and underwriting transactions. It is also an important source of funding as a limited partner in several VC funds, while supporting entrepreneurs in various other ways, such as providing finance for pet projects such as wineries.
“I hope the same VC owns the band[ed] together and kept deposits, that [portfolio company] deposit in SVB and ‘keep calm’,” said Sanjay Gosalia, head of product at SVB until last year, in a LinkedIn post. “He basically betrayed his partner and definitely shot himself,” he said.
In the 48 hours before the Fed stepped in, almost 500 VCs signed a statement saying they would encourage portfolio companies to keep using SVB if they were recapitalised – although the two biggest, Andreessen Horowitz and Founder Fund, were absent from that list.
Several VCs are negotiating to recapitalize their own banks, according to people involved in the talks last week. Some including General Catalyst, Khosla Ventures and Greylock offer portfolio companies low-interest loans to keep them going until their deposits are released.
Different dynamics play out in person. On Wednesday, after the bank’s attempt to raise $2.25bn in the sale of shares was founded, the message pinged between VCs and start-ups. Running on SVB is accelerated because the founders of the company remove funds with the swipe of a finger. On Thursday, customers had already started withdrawing $42bn. On Friday, the bank was bust.
“When they raise capital, essentially what happened is that VCs began to advise companies that, when the risk is low, they might be best served by pulling capital out of SVB,” Taneja said. “As the news spread, so did the bank… in today’s world we’re all online: bank runs don’t happen over a few days, they happen in hours.
As soon as SVB’s problems appeared, Robin Klein, one of the most active early-stage investors in the UK through the company LocalGlobe, contacted the portfolio company to advise on what he described as “the basic principle of treasury management, which is the diversification of providers”, and helped him open an account in alternatives to SVB, including UK fintechs Wise, Starling, Monzo and Tide.
“I’m very careful not to say ‘take all the money’, but I’m also not ready to say ‘do nothing’,” Klein said. “Some people interpret it as, ‘They’re trying to stop at the bank’. Others may interpret it the other way. . . It’s a difficult balance.”
One UK founder says many investors shy away from giving clear advice. “They don’t want to be seen as leading to the bank,” he said. “But he didn’t say ‘leave the money’ either, because he knew the existential threat to his portfolio.
Some VCs are less ambiguous. Arjun Sethi, founder of venture fund Tribe Capital, said he had started advising his portfolio companies to withdraw as early as last week.
“We have several companies working with SVB on credit lines for fintech products,” he said. “And [SVB] began to come less. For me, it was a signal to reevaluate the relationship.
Sethi added: “I was stabbed by my colleagues in the ecosystem for not supporting SVB. But my job is not to ensure SVB remains solvent. I have a fiduciary duty to my company. It’s not to cause a run on the bank, but you don’t want to be the last one holding the bag .
Another venture capitalist says the logic is simple: “If you’re going to panic, panic first.”
SVB’s problems are partly self-inflicted. Deposits at banks rose dramatically during the pandemic as customers of tech startups surged, and invested heavily in long-term, fixed-rate, government-backed debt securities. That led to a rise in interest rates, which reversed the growth of technology companies and hit the prices of securities.
Stress tests designed after the 2008 financial crisis to prevent a credit crunch failed to capture the threat of rate hikes. But when SVB’s problems came to light, it was the response of venture capital firms that created a fatal stampede.
“There’s a story about how venture capital and the world of Silicon Valley. They killed their relationship bank,” said a short seller who has fought the bank. “I don’t think that open banks will happen. SVB is generally unnecessary and it is stoked by venture capitalists freaking out,” he said.
Many VCs are considering a less certain future with major banks in the hands of regulators. “The FDIC has done the right thing by protecting depositors, now it’s time to make sure the industry has viable banks for their needs,” Taneja said.