A Brinks armored truck sits parked in front of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
On Wednesday, Silicon Valley Bank was a well-capitalized institution seeking to raise some capital.
Within 48 hours, a panic induced by the very venture capital community that SVB had served and nurtured ended the bank’s 40-year-run.
Regulators shuttered SVB Friday and seized its deposits in the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever. The company’s downward spiral began late Wednesday, when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet. What followed was the rapid collapse of a highly-respected bank that had grown alongside its technology clients.
Even now, as the dust begins to settle on the second bank wind-down announced this week, members of the VC community are lamenting the role that other investors played in SVB’s demise.
“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor of Restive Ventures, told CNBC. “This is going to go down as one of the ultimate cases of an industry cutting its nose off to spite its face.”
Falvey, a former SVB employee who launched his own fund in 2018, pointed to the highly interconnected nature of the tech investing community as a key reason for the bank’s sudden demise. Prominent funds including Union Square Ventures and Coatue Management blasted emails to their entire rosters of startups in recent days, instructing them to pull funds out of SVB on concerns of a bank run. Social media only heightened the panic, he noted.
“When you say, `Hey, get your deposits out, this thing is gonna fail,” that’s like yelling fire in a crowded theater,” Falvey said. “It’s a self-fulfilling prophecy.”
A customer stands outside of a shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
Falvey, who started his career at Wells Fargo and consulted for a bank that was seized during the financial crisis, said that his analysis of SVB’s mid-quarter update gave him confidence. The bank was well capitalized and could make all depositors whole, he said. He even counseled his portfolio companies to keep their funds at SVB as rumors swirled.
Now, thanks to the bank run that ended in SVB’s seizure, those who remained with SVB face an uncertain timeline for retrieving their money. While insured deposits are expected to be quickly available, the lion’s share of deposits held by SVB were uninsured, and its unclear when they will free up.
The episode is the latest fallout from the Federal Reserve’s actions to stem inflation with its most aggressive rate hiking campaign in four decades. The ramifications could be far-reaching, with concerns that startups may be unable to pay employees in coming days, venture investors may struggle to raise funds, and an already-battered sector could face a deeper malaise.
This story is developing. Please check back for updates.