The SVB collapse and what it means for you

If you have not heard yet, Silicon Valley Bank (SVB) collapsed over the weekend. News of this collapse has already set off panic and confusion across Wall Street, with many people wondering about the implications for tech startups, particularly those that are at early-stage. Many people, especially those working at smaller startups, were concerned and reached out to me over at Instagram to ask for my take on the situation. While I do not want to speculate anything and add to the fear, but I do think it is important to understand what happened. I will explain what happened to SVB and what that means for the tech industry.

What happened?

So provide some context, Silicon Valley Bank was used by almost half of all venture-backed companies in the US, as well as many in the UK. Therefore, the repercussions of its collapse are significant. On March 8, 2023, SVB announced its latest earnings and revealed that it had suffered from a slowdown in venture capital funding, declining customer deposit volume, and losses on investments it had made. And as a result, it was going to sell off some assets to meet the demand for customer withdrawals. This news set off fear in the tech industry, which started a bank run that led to the complete shutdown of the bank in less than 48 hours.

You may be wondering what a bank run is. Well, a bank run is basically a situation in which a large number of customers of a bank or other financial institution withdraw their deposits simultaneously due to concerns about the bank's solvency. This can lead to the bank's failure if it is unable to meet the demands of its depositors. All banks are exposed to what is called Asset Liability Mismatch. This refers to the situation where a bank’s liabilities like customer deposits can be withdrawn on demand, but the bank’s assets, which are typically longer-term loans or securities, might not be liquid or fluctuate in value. Banks invest in longer-term loans or securities to generate income to pay depositors some amount of interest while earning a profit on the spread. However, banks do not invest all customer deposits in longer-term loans and securities. They aim to maintain ample liquidity to meet potential customer withdrawals. The main problem with Silicon Valley Bank (SVB) was it’s lack of diversity in it’s customer base — most of its customers where venture capital-backed companies and start-ups. So, when the stock market and private equity markets went down last year, many of these firms didn't try to get newer loans, and instead used the money they already had. This meant that more customers than expected took money out of SVB, and the bank had to sell some of its investments for less money than it paid for them. This scared people who had money in the bank, and so they took even more money out. And things went from bad to worse when a few important venture capital firms, like the one Peter Thiel leads, told their companies to take their money out of SVB. A large venture capital firm can have 100s of companies under its portfolio, so a message like this can send many companies into a withdrawal frenzy.

Unfortunately for a bank like SVB, once panic sets in, and more people join the fray, it is almost impossible to control — it is like a small snowball turning into a massive avalanche. And sadly, that is exactly what happened. By midday on March 9, the bank’s systems were completely swamped by customers requesting to withdraw money, to a point where people were not even able to log in. By the end of the day, SVB had processed over 40 billion dollars of withdrawals. By Friday morning, the FDIC closed the bank. So SVB went from being one of the largest banks for venture-backed companies and startups to being out of business in less than 48 hours.

So what about the start ups whose money was help at SVB?

People or companies who got in their requests early were able to get their money, but for a majority, the question is whether or not they will actually receive 100% of their money, and even if the answer is “yes”, by when? I am recording this late Sunday, and so far, the FDIC, Federal Reserve, and US Treasury have jointly announced a plan to guarantee deposits of all sizes. This is mainly to try to prevent a contagion risk, where is a wide-spread panic and even other banks potentially face the same fate. So far, the US economy has powered along with record employment and strong growth, even as the tech sector has gone into a slump. So, hopefully, this will just be a one-off situation and does not set off a widespread panic leading to a much larger economic crisis.

I know people are drawing parallels to the 2008 financial crisis, but I don’t believe that such a comparison is warranted or even correct. Leading up to the 2008 financial crisis, banks gave out risky interest-only adjustable-rate mortgages to people with low or no credit history. These borrowers wanted these loans because they thought they could refinance before they had to start paying off the loan. And they also hoped to make money by selling their house for more than they paid. But when they couldn't refinance, they couldn't pay their loans either. Banks had to hold on to these bad loans because no one wanted to buy them. The Federal Reserve had to step in to buy them. But right now, no bank gives out these bad loans. Some banks may have to sell some assets to meet customer withdrawals just due to how the economy is shifting, but that’s normal, and shouldn’t be considered anything drastic. This is completely different from what happened in 2008. In fact, as the equity markets panic, the interest rates have actually fallen and the treasury prices have gone up. So, this may just be a self-correction and may actually help the banks recover. What I can opine on is In any case, I am not a finance professional, so do your own research.

How does this impact start ups and the tech sector?

What I can opine on is the impact this will have on the tech industry. Regardless of whether there are greater implications because of this or not, this is obviously a massive hit on the US start-up sector. Most early-stage start-ups will struggle to make payroll and infrastructure costs, especially if they aren’t able to recover their money right away. I’ve been a tech startup founder myself, and back in 2015, our company was valued at around 5M with venture-backed initial seed money of around 750k. Four of us were co-founders, and none of us were taking any salary for ourselves and had not done so for a few years. Our plan however, was to invest the seed money into hiring 2 full-time software engineers and spend the rest on product infrastructure like cloud costs, and on go-to-market strategies. And I know from first-hand experience that even just two entry level full time software engineers can cost up to 400-500k a year when you factor in recruitment, compensation and benefits costs. I can only imagine the absolute panic and helplessness I would feel if the bank that held my company’s seed money was suddenly closed. How would I pay my engineers next month? How would I run any campaigns to push the product? How would I pay the infrastructure costs? It could have completely killed the company and destroyed our dreams.

And this is exactly the same headaches start up co-founders and leadership will be facing in the aftermath of this event. Most early-stage startups will struggle to meet payroll and infrastructure costs, especially if the FDIC isn’t able to give them their money right away.

What should you do if you work at one of these start ups?

So the elephant in the room is what you should do as a software engineer if you work in an early or even late-stage startup in the US right now? Well, if you’ve been paying attention, you’ve probably picked up that a lot of this could have been avoided if people, and in this case specifically, the VCs didn’t panic. So my advice to you is exactly that — don’t panic. The tech economy has already faced a few blows since 2022, and now this has caused major ripples in the tech start up sector. The last thing you want to start en masse, is a job migration in tech. Look, the reality is that your startup might already have diversified its cash reserves in multiple banks, or is in the process of doing so. And maybe the FDIC will ensure everyone gets their cash back right way. Just keep an eye out on the news, ask your leadership to be transparent, and if you have the financial means to weather this storm, have faith in the company and it’s founders. You joined the company in the first place because you must have believed in their vision, that has not changed because of this, so my suggestion would be keep that belief.

In summary, while it is important to understand what happened with SVB and its implications for the tech industry, mainly venture-backed startups, it is also important to avoid panicking. So at least for now, stay calm and carry on.