Silicon Valley Bank, a financial pillar of the innovation economy, is in a liquidity crisis that has sent shock waves through the startup ecosystem and prompted countless depositors to pull their funds from SVB accounts.
In a sign of the widespread financial stress that has weighed on startups recently, SVB said Wednesday that its clients’ cash burn rates, coupled with declining VC investment, have resulted in shrinking deposits.
The bank’s crisis underscores the extent of the turmoil spreading throughout the venture ecosystem, and raises questions about the ability of many startups to ride out the current economic downturn if they’re unable to get their money back from SVB.
To manage the cash crunch, the bank’s publicly traded parent, SVB Financial, has sold fixed-income investments worth $21 billion at a roughly $1.8 billion after-tax loss and is now seeking to raise new capital through a share sale.
The alarming developments have sent investors and startups scrambling.
Some VCs have urged calm, warning that panicked withdrawals would compound the bank’s problems. Others have advised startups to withdraw funds above the federally insured limit of $250,000.
Many customers were unable to withdraw funds on Thursday after SVB’s online banking system apparently crashed or froze during the turmoil. It wasn’t immediately clear how many account holders had pulled out money prior to the outage, but there were widespread reports of customers doing just that.
The bank expressed confidence that it would weather the storm: “We are experienced at navigating market cycles and are well positioned to serve our clients through market volatility, with a high-quality, liquid balance sheet and strong capital ratios,” SVB Financial CEO Greg Becker wrote in a letter to investors.
SVB did not respond to requests for comment.
“SVB has been a key partner to not just us but the entire tech ecosystem through many volatile times,” said Yash Patel, general partner at Telstra Ventures. Patel added that his firm is waiting to understand the situation before advising startups on how to proceed.
“Every one of our investors is telling me that their companies are pulling capital out,” said Quincy Lee, founder and CEO of Electric Era, a startup that builds electric vehicle charging stations. Lee has been locked out of his SVB corporate account since Thursday afternoon.
SVB Financial said Wednesday that it is planning a $2.25 billion stock sale to restructure its balance sheet. The sale includes an offering of $1.25 billion of its common shares and a $500 million mandatory convertible sale. Growth equity investor General Atlantic has committed to purchase $500 million worth of SVB stock in a private placement.
On Wall Street, SVB’s share price closed down more than 60% on Thursday as investors reacted to the fast-moving drama.
“Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios,” Morningstar analyst Eric Compton wrote in a note.
