UPDATE: On Sunday, March 12, the U.S. Treasury Department, Federal Reserve Bank and Federal Deposit Insurance Corporation (FDIC) announced that that “depositors will have access to all of their money starting Monday, March 13.” For details, read the full joint statement.

On Friday morning, regulators closed Silicon Valley Bank (SVB), roiling the startup world and creating uncertainty about the availability of deposits and the availability of credit to its customers and borrowers. Unexpected announcements about its financial situation and plunging stock prices triggered an unsustainable run on the bank. Over its 40-year history, SVB became the go-to bank for the technology industry, offering relatively quick and inexpensive credit facilities and lines of credits for venture-backed companies and venture capital firms. It is estimated that it served between 50-65% of venture backed companies, with $175 billion in deposits as of December 31, 2022.

The Federal Deposit Insurance Corporation (FDIC) was appointed as receiver of SVB and created a new bank, the National Bank of Santa Clara, to hold its deposits and assets. The original accountholders will be able to access all insured deposits (up to $250,000) by Monday morning. Depositors with uninsured deposits, which include all deposits in excess of $250,000, are expected to receive an undetermined amount in the form of an advance dividend next week and will receive a receivership certificate for the balance of their uninsured funds. As the FDIC liquidates the assets of SVB, future dividend payments may be made to the original accountholders for the balance of their uninsured deposits. There are reports that more than 93% of the bank’s deposits are uninsured.

The Fast Path to Collapse

At the end of the trading day on March 8, SVB surprised the markets and depositors by announcing that it had lost $1.8 billion in a liquid securities sale and that it was seeking to raise money and shore up its finances by selling equity. This triggered surprise and concern, which quickly turned to panic that triggered investor trading and led to a 60% decrease in SVB’s share price on Thursday. On Friday the selloff continued and SVB lost another 68% in value before trading was halted. Meanwhile, the startup world started questioning whether deposits were safe. Portfolio managers and investors started reaching out to their portfolio companies encouraging them to pull any money out of SVB as quickly as possible, triggering the run on the bank from which it could not recover.

On Friday morning, regulators took the unusual step of closing the bank before the end of the trading day. SVB is the largest bank to fail since the 2008 financial crisis and the second-largest FDIC-insured bank ever to fail. Other major bank stocks have slumped this week as well.

More Questions Than Answers

Companies with SVB accounts, lines of credit and credit facilities will be wondering what this means for them, when they can access their funds, if they will be able to get all their funds out, and whether they will have access to their credit lines. Additional information and answers will be released as the FDIC receivership unfolds. Here’s what we know so far:

• When can you access your accounts? The new bank will be open for business on a limited basis by Monday. In this instance, the FDIC has stated that it created a new institution (the Bank of Santa Clara) to which it has transferred the assets of SVB.
• Insured deposits up to $250,000: Accounts are insured up to $250,000 per depositor, which includes all accounts in the name of that depositor (i.e. savings, checking, CDs, etc.), and the FDIC has said those insured amounts will be available on Monday. Unfortunately, most startups with SVB accounts have significantly more than $250,000 on deposit, leading us to …
• Uninsured deposits:
  • Depositors will not have immediate access to their uninsured deposits.
  • The FDIC will issue certificates to account holders for amounts in excess of $250,000 which will be paid as assets are liquidated.
  • The FDIC indicated that it would make a dividend payment next week on these uninsured deposits, but the amount and timing is not yet known. Additional dividend payments may be made as the receivership continues.
  • Depositors may never receive all the uninsured funds on deposit, and for funds they do receive, will not be able to choose the timing of those distributions.
  • The FDIC suggests that customers with accounts in excess of $250,000 contact the FDIC toll-free at 1-866-799-0959.
• SVB loan obligations: Loan obligations to SVB continue – there are no payment holidays.
• Check processing: Checks being processed through the banking system will be cleared, but no, the depositor cannot write a large check to withdraw its funds.
• SVB creditors: As the regulators liquidate assets, SVB obligations to creditors, including those to depositors of more than $250,000, are paid.
• Lines of Credit: SVB customers with lines of credit should assume that they cannot draw down those lines of credit.

What To Expect

In a best-case scenario, the FDIC arranges a deal in which another financial institution buys SVB, which could mean that client accounts reopen early next week and venture lending continues relatively uninterrupted. If that does not happen, on Monday SVB will remain in receivership and SVB customers will anxiously look to the FDIC to see what the advance dividend payment will be. In this scenario, here are a few things to consider:

• Long term recovery of funds: SVB depositors with uninsured funds may never receive all of their deposited funds and will not be able to withdraw the funds they are able to get on their own timeline. This will leave some companies unable to make short-term payments such as payroll and vendor payments unless they are able to quickly access funds from other sources. Companies may need emergency loans to plug the gap. Some are urging investors to offer emergency money to their portfolio companies.
• Venture debt vacuum: Unless traditional banks step in to fill the vacuum left by SVB, access to quick and cheap venture debt may be much harder to come by. Venture-backed companies should not assume that they will have access to the kind of venture debt that has sustained them in the past.
• Vanishing LOC insurance: SVB lines of credit provided rainy day insurance for many venture-backed companies so that they could significantly extend their runway in a bad market or crisis … like this one. That insurance disappeared overnight. If those companies cannot replace those lines of credit, a number of venture-backed companies suddenly have shorter runways than they anticipated.
• Venture capital funding: VC-backed companies are already having a hard time raising money in the current market. It is unclear how much VC money is tied up at SVB. Depending on the volume, this may limit the capital available for funding rounds even more than current market forces.

We are monitoring the situation and will provide additional guidance and updates as we receive more information.

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