On Wednesday last week, rumors started to circulate that Peter Thiel’s Founder’s Fund was telling their portfolio companies to pull their capital from Silicon Valley Bank (SVB) because SVB was not going to stay solvent for much longer.
By that evening, I started getting texts from founders in my portfolio who bank with SVB. “Should we pull our money out?” was the No. 1 question. “What do you think we should do?” one founder asked me on the phone.
I did not know the right answer. The situation was rapidly developing, and more and more doubt started to set in with each passing hour. Still, I did not want to believe the worst – there’s no way a 40-year-old bank, a pillar in the Silicon Valley start-up community, would fail like that, I told myself.
I was wrong. By mid-day Thursday, it was looking dire. “I can’t access my company’s account,” said one client. “My wire transfers are not going through,” said another. My Slack, SMS, and email exploded with messages like this.
It was a full-on bank run.
What happened last Thursday and Friday sent shockwaves throughout the tech industry. Customers of SVB tried to withdraw $40 billion worth of cash. Within 48 hours, SVB failed. By Friday evening, the FDIC took over.
Start-up founders and VCs, including me, entered the weekend with a major uncertainty whether we would get our deposits back. Many of my portfolio companies are cybersecurity start-ups. Some have their entire cash balance in SVB. These companies didn’t know whether they could make payroll in the coming weeks. Because some of them market vital cybersecurity products and services for many customers, the prospect of not being able to maintain the same level of support and services would hurt a broad range of industries.
By Saturday morning, the SVB situation was what all everyone could talk about around Silicon Valley. It struck me how the future of many companies and livelihoods of thousands of families depend entirely on the solvency of this one bank.
On Sunday afternoon, the Fed announced that depositors would have full access to their money starting Monday morning. This was great news for SVB depositors, including many of Rain Capital’s portfolio companies.
As SVB customers look to rebuild, the impact of the SVB failure has been felt across many industry sectors. Similar scenarios played out this week with Signature Bank and First Republic. While depositors pulled their funds from these regional, specialized banks into larger institutions like Bank of America and JPMorgan Chase, questions remain about outstanding venture debts and more importantly, where start-ups can go for the type of venture lending for which SVB was known.
Moving forward, while it’s unlikely that we’ll see a widespread banking failure, the events of the past week highlight the importance of having contingency plans in place for any unexpected events.
After the SVB failure, many founders and company leaders realized the need for a diversified cash management approach. More specifically, consider these steps:
- Diversify banking relationships. If the organization has a high amount of cash assets, consider establishing multiple accounts across different banks to reduce the risk of a single bank failure impacting the business. Ensure that one of these banks trade across a wide range of asset classes. Use one bank for operations and the other as a backup, but make sure that the company can quickly move funds from one bank to another.
- Look for better returns on excess cash. Set up sweeping accounts, where all excess cash automatically gets put into a higher-earning investment vehicle. This ensures that the company earns a good return on its cash assets.
- Understand the company’s venture debt obligations. Companies that bank with SVB and have a venture debt contract with SVB should understand their obligations with respect to the debt instrument. For instance, moving funds out of SVB may invalidate the line of credit. Explore new venture debt options, if appropriate.
We expect that the Fed will conduct a sweeping regulatory review for banks and enact stricter oversight policies and liquidity rules for all banks. While these moves may bring stability to the banking system, there’s a risk that they may stifle innovation. It’s important to strike a balance between regulation and innovation to ensure that the U.S. remains a leader in the tech industry.
I think it's best to consider the SVB failure a black swan event that has highlighted the importance of contingency planning, diversification, and regulatory oversight in the banking system. Founders and business leaders should take proactive steps to protect and optimize their companies' cash assets. While we still haven’t seen the full impact of the SVB failure, there’s low risk of a widespread banking failure. However, now’s an excellent time for business leaders to establish a smart cash management strategy to ensure sustainable operations.
Chenxi Wang, founder and general partner, Rain Capital.