Silicon Valley Bank’s customers are struggling to meet their paychecks and pay bills

Employees stand in front of the closed Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

The sudden collapse of Silicon Valley Bank Thousands of tech startups are wondering what will happen to their millions of dollars in deposits, money market investments, and outstanding loans now.

Above all, they are trying to figure out how to pay their employees.

“The number one question is, ‘How are you going to do payroll over the next few days,'” said Ryan Gilbert, founder of venture firm Launchpad Capital. “No one has the answer.”

SVB, a 40-year-old bank known for managing deposits and loans for thousands of tech startups in Silicon Valley and beyond, collapsed this week and was shut down by regulators in the biggest bank meltdown since the financial crisis. The decline began late Wednesday, when SVB said it was selling $21 billion worth of securities at a loss and trying to raise money. Late Thursday, things turned into all-out panic as the stock plummeted 60% and tech execs rushed to withdraw their funds.

While bank failures are not uncommon, the SVB is a unique beast. According to the bank, it was the 16th largest bank by assets at the end of 2022 federal reservewith assets of $209 billion and deposits of over $175 billion.

Unlike a typical brick and mortar bank – Chase, Bank of America or Wells Fargo — SVB is focused on serving companies, with more than half of its loans being made to venture funds and private equity firms and 9% to early and growth-stage companies. Customers who turn to the SVB for loans also tend to keep their deposits with the bank.

The Federal Deposit Insurance Corporation, which became the SVB’s receiver, insures $250,000 of deposits per customer. Since SVB mainly serves companies, these limits do not mean much. According to filings with the SEC, about 95% of SVB deposits were uninsured as of December.

There will be a lot of fear for SVB over the next few days, says Rich Heitzmann of FirstMark Capital

The FDIC said in a press release that insured depositors have access to their money until Monday morning.

However, for uninsured depositors, the process is much more complicated. They will receive a dividend covering an undetermined amount of their money within a week and a “receipt for the remaining amount of their uninsured monies”.

“As the FDIC sells Silicon Valley Bank’s assets, future dividend payments may be made to uninsured depositors,” the regulator said. Typically, the FDIC placed the assets and liabilities in the hands of another bank, but in this case it created a separate institution, the Deposit Insurance National Bank of Santa Clara (DINB), to handle insured deposits.

Customers with uninsured funds — anything over $250,000 — don’t know what to do. Gilbert said he advises portfolio companies individually rather than sending out a bulk email because every situation is different. He said the universal concern will hit payroll for March 15.

Gilbert is also a limited partner in over 50 venture funds. On Thursday, he received several messages from companies about capital calls, or the money that investors send into the funds when transactions take place.

“I’ve had emails saying don’t send money to the SVB and if you should let us know,” Gilbert said.

Payroll concerns are more complex than just accessing frozen funds, as many of these services are handled by third parties who have worked with SVB.

Rippling, a back-office-focused startup, handles payroll for many tech companies. On Friday morning, the company sent a note to customers telling them it was moving “key elements of our payments infrastructure” to , following the SVB news JPMorgan Chase.

“You must notify your bank immediately of any significant change in how Rippling charges your account,” the memo said. “If you don’t make this update, your payments, including payroll, will fail.”

Rippling CEO Parker Conrad said in a series of tweets on Friday that some payments are being delayed as part of the FDIC process.

“Our top priority is getting our clients’ employees paid as quickly as possible, and we’re diligently working on it through every available channel trying to understand what the FDIC acquisition means for payments today,” Conrad wrote.

One founder, who asked to remain anonymous, told CNBC that everyone is muddled. He said he spoke to more than 30 other founders and spoke to a chief financial officer of a billion-dollar startup who tried unsuccessfully to get more than $45 million out of SVB. Another company with 250 employees told him that SVB has “all our money”.

An SVB spokesman pointed this out to CNBC Statement of the FDIC when you are asked to comment.

“Significant risk of infection”

For the FDIC, the immediate goal is to allay fears of systemic risk to the banking system, he said Mark Williams, who teaches finance at Boston University. Williams is intimately familiar with both the subject matter and the history of SVB. He worked as a bank supervisor in San Francisco.

Williams said the FDIC has always tried to work fast and make depositors healthy, even when the money isn’t insured. And according to SVB’s audited financial data, the bank has the cash on hand – its assets are greater than its liabilities – so there is no apparent reason why customers shouldn’t be able to access the bulk of their funds, he said.

“Banking regulators understand that unless action is taken quickly to heal SVB’s uninsured depositors, there would be significant risk of contagion to the broader banking system,” Williams said.

Treasury Secretary Janet Yellen met with leaders from the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency on Friday regarding the collapse of the SVB. The Treasury said in a read aloud that Yellen “expressed full confidence in banking regulators to take appropriate action, noting that the banking system remains resilient and regulators have effective tools to respond to these types of events.”

On site in Silicon Valley, the process was anything but smooth. Some executives told CNBC they were able to successfully move their money by sending in their transfer early Thursday. Others who took action later in the day are still waiting — millions of dollars in some cases — unsure of their near-term commitments.

Regardless of whether and how quickly they can get back up and running, companies will change their attitude towards their banking partners, said Matt Brezina, a partner at Ford Street Ventures and an investor in startup bank Mercury.

Brezina said the biggest post-payroll problem facing his companies is access to their credit facilities, particularly for those in fintech and labor markets.

“Companies will end up diversifying their bank accounts much more, which is a result,” Brezina said. “This is causing a lot of grief and headaches for many founders right now. And it will also affect your employees and customers.”

The SVB’s rapid failure could also serve as a wake-up call for regulators when it comes to dealing with banks that are heavily focused on a particular industry, Williams said. He said that SVB has always been too exposed to technology, although it managed to survive the dot-com crash and the financial crisis.

In his Mid-quarter update, which began its downward spiral on Wednesday, SVB said it is selling securities at a loss and raising capital because start-up clients continue to burn cash at a rapid pace despite the ongoing slump in fundraising. As a result, the SVB found it difficult to maintain the necessary level of deposits.

Rather than sticking with SVB, startups saw the news as problematic and opted to rush to the exits, a swarm that gained strength as VCs directed portfolio companies to get their money out. Williams said SVB’s risk profile has always been an issue.

“It’s a concentrated bet on an industry that’s going to do well,” Williams said. “The liquidity event would not have happened if they weren’t so concentrated in their deposit base.”

The SVB was founded in 1983 and is according to its own information written history, was designed by co-founders Bill Biggerstaff and Robert Medearis over a poker game. Williams said this story is more appropriate now than ever.

“It started as a result of a poker game,” Williams said. “And that’s how it ended.”

— CNBC’s Lora Kolodny, Ashley Capoot, and Rohan Goswami contributed to this report.

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