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When Liz Giorgi started her second business – an online platform that allows internet retailers to get high-quality photos of their goods – she thought getting a bank account would be easy. Eventually, she had no trouble getting credit cards, loans, or checking accounts for her first venture, a manufacturing company that she successfully sold after seven years.
It was different this time. Her longtime bankers were nervous about working with a small internet software start-up. She tried the big national banks, in vain. A total of 27 banks rejected them.
Then, in 2019, she found Silicon Valley Bank.
Giorgi came into contact with the Californian bank through Techstars – a renowned start-up mentoring program. SVB representatives flew to Colorado, where the show was taking place, took her to lunch and courted her. Twenty-four hours later, Giorgi’s company Soona finally had a bank account.
Countless startups tell stories of the same red carpet treatment. For 40 years, SVB grew with the technology industry, becoming an integral part of the tight-knit community while serving both startups and their employees — eventually becoming the bank of choice for some of America’s most powerful and wealthy people.
Then, a week ago, everything collapsed. Customers rushed the bank and withdrew $42 billion after showing signs of financial weakness. The morning after, the government stepped in and shut it down.
Now the tech and venture community reels at the loss and worries that the collapse of SVB will stall America’s engine of innovation. Questions are already emerging as to whether lending to small tech companies is a viable business model for the future. And startups – many of which are inherently risky for banks – are unsure of who will help them get ahead.
“I’m disappointed,” said Giorgi. “We had a relationship with a bank that understood our business and we as an industry haven’t kept our eyes on the ball enough to really continue to ensure that this is a safe mechanism.”
Concerns are growing across the tech industry
The meltdown at SVB adds to general concerns about the tech industry, which after years of meteoric growth is finally facing a significant slowdown and mounting skepticism – particularly when it comes to its riskier businesses. Companies like Amazon and Facebook parent Meta have laid off tens of thousands of workers to streamline their businesses and return to previous levels of profitability. Tech giants are moving away from developing “moonshot” projects. It has become more difficult for start-ups to raise money to start and sustain their business.
Amazon founder Jeff Bezos owns the Washington Post. A spokesman for the SVB did not respond to a request for comment.
While the government has allowed start-ups and other depositors to get their funds back, SVB’s elimination is a major blow amid the already worrying climate for technology – and will set the industry back even further.
Founded in 1983, the bank has specifically targeted venture capital-backed technology companies, a sector where failure is the norm. It takes most companies years to turn a profit, and only a small handful break through and become business titans like Google and Facebook.
SVB’s willingness to take those risks has made it an integral part of the Bay Area tech scene. Start-ups celebrating multimillion-dollar financing rounds deposited the money there. Tech execs looking for a mortgage tapped the bank. And the company also became known for providing banking services to the posh wineries where its tech clientele went on retreats and weekend getaways.
It became a ubiquitous tech conference sponsor, and the start-up boom that followed the 2008 financial crisis saw SVB expand across the United States and then around the world, opening offices in Canada, Germany, Israel and a handful of other countries , among other things, a shining example of the success and innovation emerging from the American tech scene.
At the time of its collapse, the company served more than half of the venture capital-backed companies in the United States, according to its website. It also required many customers to bank with it solely as a condition of the service, leading to even greater concentration.
As the bank’s deposits exploded in tandem with the tech boom, it placed vast amounts of money in long-term bonds. But over the past year, steadily rising interest rates have meant venture capitalists have become more conservative, forcing start-ups to work with the money they have rather than expect fresh rounds of funding in the coming months. Many siphon off most of the cash they have accumulated over the years in the SVB.
Breaking down the collapse of the SVB
Last week, the company surprised investors and depositors by saying it had sold $21 billion of its assets and will sell some of its own stock to shore up its balance sheet. The long-term bonds that the bank had invested so much money in — traditionally a safe bet — were now worth less than what the bank was paying for them because higher interest rates meant people could now find other bonds that had higher interest rates elsewhere paid.
The same people who had been ready for years to hoard their company’s money and their private fortune with the SVB were suddenly reluctant. Concerns spread in group chats and social media. High profile venture firms have asked their portfolio companies to exit.
What’s left belongs to the government, which has committed – in a dramatic move – to paying deposits in excess of what the Federal Deposit Insurance Corp. $250,000 insured limit to ensure every SVB customer is fully reimbursed.
That guarantee has curbed the immediate panic that swept through the tech world over the weekend. On Monday, most businesses were able to access their money and many began taking it out to deposit with other banks. But the long-term effects of the failure of the SVB are only just beginning to have an impact.
“The biggest loss we will feel is the social fabric that SVB provided,” said Casey Rosenthal, CEO of security software company Verica. “My investors and I will have a much harder time finding financial solutions like venture debt loans from other banking providers that aren’t as tech-savvy.”
Customers were queuing to withdraw their money earlier this week. A venture capitalist, who spoke on condition of anonymity to keep his firm’s finances private, said he plans to take his business to Citi or Bank of America instead.
His company was among those who last week told its portfolio companies to withdraw their funds from SVB, a position he acknowledged as part of the bank’s demise.
“It’s frustrating because you get a warning sign … it doesn’t cost anything to take your money elsewhere and you may be risking money if you leave it in,” he said.
Politicians from both left and right have criticized the government’s bailout of the SVB, and President Biden has taken pains not to call it a “bailout” for fear of being accused of helping wealthy bankers.
Isa Watson, CEO of New York-based social media company Squad, said her start-up has reached an agreement with SVB to do banking only. Despite this, she did not look for alternatives before the bank run.
“SVB was the only bank that really took us seriously in our early days, before we started raising venture capital,” said Watson, who started banking at SVB five years ago.
Last week, Watson first heard something was wrong on Wednesday night. By Thursday it was all over social media.
Watson consulted with investors and other founders about whether to withdraw her company’s money. But before she could make one final call, the government stepped in and shut down the bank. She spent the weekend transferring the company’s recurring bills to her personal credit card.
“There has to be an SVB replacement,” she added.
What that could be is currently unclear. Other regional banks in the Bay Area also cater to startups and tech founders, like First Republic Bank, but none have the level of expertise and reputation that SVB has. And investors are concerned that First Republic could also run into trouble — shares are down 82 percent since March 8.
The government is examining what’s left of SVB for potential buyers, but new management may be skeptical about the business model, which may have left the bank in a precarious position. Start-ups themselves will be careful not to put all their eggs in one basket and will likely bank with multiple banks in the future.
The tech world isn’t perfect, and much of the criticism leveled at it, such as the lack of funding for female founders, is valid, Giorgi said. However, the collapse of the SVB raises a new set of problems that no one anticipated.
“There are clearly problems here. I just think none of us expected that the big problem was our bank,” Giorgi said. “It wasn’t the one we saw coming.”
Lisa Bonos contributed to this report.