Listen to this article Startups At Risk Of Cash Shortage And Extinction If Silicon Valley Bank Not Bought By Monday.
Background and Introduction
On Friday, California regulators shut down Silicon Valley Bank (SVB) after a failed $2.3 billion capital raise caused its stock to crash, prompting the Federal Deposit Insurance Corporation (FDIC) to take control of the bank. As a result of the bank’s collapse, hundreds of startups that deposited their cash with SVB are now in turmoil, attempting to continue their operations while millions of dollars in funds are inaccessible. This situation has prompted many to scramble for alternative sources of cash to make payroll.
Impact on Startups
Startups that had their cash at SVB are facing a massive cash crunch, as they struggle to find ways to access their funds. The collapse of SVB has affected even those who did not have a direct banking relationship with the institution. The healthtech startup Flow Health, for instance, used Rippling, which held an account with SVB, as its payroll provider. According to the CEO of Flow Health, Alex Meshkin, the company has no way of paying its employees at the moment. Given that SVB supported almost half of US venture-backed startups at the end of December, experts anticipate extensive ripple effects from the bank’s collapse.
Startups Scramble for Cash
Many startups are struggling to find ways to access their funds and make payroll, given the sudden closure of SVB. The VC ecosystem is echoing the need for startups to make payroll. Founder Nikita Bier, for example, said in a tweet that the number of growth-stage companies that had their cash at SVB is huge, making payroll next week a difficult task. Even Sam Lessin, a partner at Slow Ventures, told CNBC Friday that a founder he had spoken to planned to cover payrolls personally and “figure it out from there.” The collapse has forced some startups to take drastic steps, like the popular toy store Camp, which informed its customers that it was in distress because the collapse trapped its funds.The company announced a 40% off sale in a bid to raise cash from its customers, instructing them to use the tongue-in-cheek code ‘BANKRUN’ at the checkout.
Extinction-Level Event for Startups
Garry Tan, CEO of startup accelerator Y Combinator, views the collapse of SVB as an extinction-level event for startups. He tweeted that it would set startups and innovation back by 10 years or more. Tan also urged people to contact their member of Congress to voice their concern. Y Combinator conducted a survey which showed that almost 400 out of its 3,000 active companies had a relationship with SVB, and over 100 of those companies were worried that they would not be able to make payroll in the next 30 days unless the issue was resolved promptly.
The Fate of SVB and Its Depositors
Depositors with SVB have $250,000 of their funds insured with the lender, and that money should be accessible no later than Monday. The remaining funds are uninsured, putting large sums at risk, as many founders and startups had millions with SVB.
On Friday, the FDIC made an announcement that uninsured depositors will receive a receivership certificate for the remaining funds. However, they haven’t provided clarity on the timeline for accessing the money and the exact amount that will be returned. Moody’s estimated that customers can expect to receive approximately 80 to 90 cents for every uninsured deposit dollar.These startups’ best chance is to find a buyer for SVB before markets reopen on Monday. If no purchaser is found, the FDIC will compensate depositors by liquidating the bank and selling its assets.