How Silicon Valley Bank's collapse ripped through global tech

Mar 14, 2023 

By Martin Coulter

March 14 (Reuters) - Not long after California startups started pulling money out of troubled Silicon Valley Bank, entrepreneurs in other parts of the world woke up to the news.

"Around 90% of our cash was in SVB," said Sam Franklin, 28, a London-based chief executive whose recruitment firm Otta specializes in tech talent. He ditched weekend "life admin" to figure out how to pay his employees at the end of the month.

In Hong Kong, Florian Simmendinger, co-founder and CEO of Hong Kong wearable company Soundbrenner, missed the start of the panic in California over SVB Financial Group SIVB.O last week, but he caught on quickly.

"I'm like, what? Are you kidding me? Like, my bank?" he said. "We already couldn't log into our account anymore during the regular business hours."

While the global effects of Silicon Valley Bank's collapse are just emerging, one thing is clear: tech startups, no matter how far apart, are intertwined. Many depend on a single mid-sized bank for their day-to-day operations.

Following the lead of California colleagues, startups in Europe and Asia gravitated to the bank, the 16th largest in the U.S. last year, whose name rang with tech cachet and which offered them specialized financial services.

U.S. FOUNDERS WARY

Quincy Lee, founder of Seattle-based EV charging startup Electra Era, tried to move millions of dollars from Silicon Valley Bank on Thursday afternoon as warning signs multiplied.

The website was down, overwhelmed by traffic. A customer service agent told him by phone that there could be a delay because so many people were trying to withdraw. By Monday afternoon, he had succeeded in getting his money and was looking for an alternative bank.

After a weekend of intense discussions over the future of SVB, U.S. regulators unveiled an emergency funding plan that gave the bank's customers access to all their deposits.

In the UK, Britain's Chancellor of the Exchequer Jeremy Hunt said the government and the Bank of England had facilitated a private sale of SVB's UK arm to HSBC HSBA.L, in a move which would protect deposits without taxpayer support.

European Union officials also assured consumers the bank had a "very limited presence" in the bloc. And Christoph Stresing, managing director of the German Startups Association expressed cautious optimism that domestic companies would get off lightly.

European stocks fell on banking industry concerns, though, and even startups that did not bank withSVB were scrambling.

"It's hard to understand just how interconnected SVB is with the start-up ecosystem," said Rachael Crook, founder and CEOof London-based healthcare start-up Lifted. Over the weekend shesoothed investors and made sure crucial service suppliers would not be hobbled, after executives raised concerns a key financial partner may have money tied up with SVB.

Aleksandr Volodarsky, CEO of Ukrainian startup lemon.io, which banks with SVB in the United States, told Reuters he started discussing the collapse with other entrepreneurs in the region on Thursday.

"We initiated a wire transfer on Friday morning and still nothing happened," he said. "We were lucky because we just made payments to developers and engineers just two days earlier."

CHINESE STARTUPS MOVING MONEY

SVB's Shanghai-basedjoint venture, SPD Silicon Valley Bank (SSVB), said it had a sound corporate structure and an independent balance sheet. SSVB is China's first technology and innovation bank, and the first Sino-U.S. joint venture bank.

As SVB was one of the few banks that made it easy for start-ups to open bank accounts for dollar financing, it was the dominant foreign bank for early-stage companies in China, advisors and companies said.

But many Chinese start-ups and fund managers are working to move their money out of SVB's U.S. arm.

One lawyer for a China-based venture capital firm said nearly all of its portfolio companies' operating cash, as well as its own operating cash was stored with SVB, and spent the weekend strategizing on alternatives.

After a rollercoaster of a weekend, Otta CEO Franklin said his company would continue banking with the UK arm of SVB and add accounts at more banks.

"The big learning curve for many of us in this industry has been, 'If you have a lot of cash, you should spread it around.'"

Reporting by Martin Coulter, Maggie Fick, Krystal Hu, Supantha Mukherjee, Hakan Ersen, Josh Horwitz, Josh Ye and Tom Sims; Editing by Peter Henderson and Richard Chang

'Absolutely idiotic'. SVB insider says employees are angry with CEO

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The blame game is on for who caused Silicon Valley Bank's collapse, and the tech sector is pointing the finger at SVB CEO Greg Becker for allowing his company to go down in history as the second-biggest US banking failure on record.

One Silicon Valley Bank employee, who requested anonymity to speak candidly, was dumbfounded by how Becker publicly acknowledged the extent of the bank's financial troubles before privately lining up the necessary financial support to ride out the storm.

This set the stage for the panic that ensued as customers scrambled to pull their money.

READ MORE: How does a bank collapse in 48 hours? A timeline of the SVB fall

People line up outside of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California. (Getty)

"That was absolutely idiotic," the employee, who works on the asset management side of Silicon Valley Bank, told CNN in an interview. "They were being very transparent. It's the exact opposite of what you'd normally see in a scandal. But their transparency and forthright-ness did them in."

Becker and his leadership team revealed last Wednesday night a hope (but no firm commitment) to raise $AU3.38 billion in capital as well as $31.5 billion in asset sales that sparked a $2.7 billion loss.

That news set off a wave of fear across Silicon Valley, where the bank serves as a key lender to tech startups. Many of them panicked, yanking $63 billion last Thursday alone when Silicon Valley Bank's stock crashed by 60 percent, according to filings by California regulators.

By the close of business that day, Silicon Valley Bank had a negative cash balance of about $1.4 billion.

"People are just shocked at how stupid the CEO is," the Silicon Valley Bank insider said. "You're in business for 40 years and you are telling me you can't raise $3 billion privately? Get on a jet and fly to Kuwait like everyone else and give them control of one-third of the bank."

Silicon Valley Bank did not respond to requests for comment but Becker has reportedly apologised to employees about the situation.

"It's with an incredibly heavy heart that I'm here to deliver this message," Becker said in a video message to staff on Friday, according to Reuters.

"I can't imagine what was going through your head and wondering, you know, about your job, your future."

READ MORE: US regulators say SVB customers will be made whole as second bank fails

A sign for Silicon Valley Bank (SVB) headquarters is seen in Santa Clara, California, U.S. March 10, 2023. 

REUTERS/Nathan Frandino (REUTERS)

'Widespread hysteria'

Jeff Sonnenfeld, CEO of the Yale School of Management's Chief Executive Leadership Institute (CELI), told CNN he agrees that Silicon Valley Bank's leadership deserves criticism for their "tone-deaf, botched execution."

"Someone lit a match and the bank yelled, 'Fire!' - pulling the alarms in earnest out of genuine concern for transparency and honesty," Sonnenfeld and Steven Tian, CELI's research director, said in an email on Sunday to CNN.

Sonnenfeld and Tian said not only was the announcement of an unsubscribed $3.38 billion capital raise Wednesday night "unnecessary" because Silicon Valley Bank had sufficient capital far in excess of regulatory requirements, but there was no need to simultaneously reveal the $2.7 billion loss.

The one-two punch "understandably sparked widespread hysteria amidst a rush to pull deposits," the two wrote, adding that they could have spaced the announcements out by a week or two and reduced the magnitude.

After his administration announced a swooping rescue of Silicon Valley Bank depositors on Sunday, President Joe Biden signaled US officials will be closely scrutinising all parties involved in the bank's collapse.

"I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again," Biden said in a statement.

The role of the Fed

For their part, Sonnenfeld and Tian argue Jerome Powell, Biden's pick to lead the Federal Reserve, and his colleagues deserve at least some of the blame.

"There should be no mistaking that Silicon Valley Bank's collapse was a direct result of the Fed's persistent and excessive interest rate hikes," they wrote.

Why? Because the Fed's war on inflation depressed both the value of the bonds Silicon Valley Bank was relying on for capital and the value of the tech startups the bank catered to.

Of course, Silicon Valley Bank had more than a year to prepare for both of those issues.

The Silicon Valley Bank insider said the mismanagement of the bank's balance sheet heading into last week was "stupidity" and questioned the strategy of the CEO and CFO.

Still, the employee, who is a Wall Street veteran, emphasised his belief that the downfall of Silicon Valley Bank was brought on by errors and "naivety," not outright wrongdoing.

"The saddest thing is that this place is Boy Scouts," he said. "They made mistakes, but these are not bad people."