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SAN FRANCISCO — Employees at start-up Flow Health didn’t receive their paychecks Friday morning.
When the deposits didn’t run out, the people in the human resources department were confused. But Alex Meshkin, Flow Health’s CEO, said he knew immediately what went wrong.
The company uses another startup called Rippling to run its payroll process. “I said, ‘I guarantee you, you’re with Silicon Valley Bank. We’re screwed,'” he said.
The Silicon Valley Bank, lender to some of the biggest names in tech, collapsed on March 10. Regulators acted quickly to avert a meltdown. (Video: Reuters)
Flow Health employees were just a fraction of the thousands of people likely affected by Friday’s stunning Silicon Valley bank collapse, which marked the second largest bank collapse in U.S. history and sent shockwaves through the tech and financial worlds.
While the government took over the bank, known for lending to start-ups but also providing private banking with mortgages and other services, deposits are only insured up to $250,000. The assets of the bank amounted to more than 200 billion dollars. About $42 billion was withdrawn from the bank on Thursday alone, according to the California Department of Financial Protection and Innovation.
Start-up founders feared they would be forced to lay off employees if money held by the bank was frozen or lost. Big companies like connected TV provider Roku and video game maker Roblox have warned investors that they have deposited hundreds of millions in cash with Silicon Valley Bank that may be at risk. And venture investors canceled scheduled meetings with startups, unsure of the implications for the industry. Other startups publicly assured customers that they were not exposed.
According to its website, Silicon Valley Bank has had relationships with more than half of the venture capitalized companies in the United States.
If the bank isn’t bailed out quickly, the fallout could be dire for many startups and the broader tech scene, said Garry Tan, chief executive officer of Y Combinator, one of Silicon Valley’s top startup incubators.
“This is an extinction-level event for startups and will set back startups and innovation by 10 years or more,” Tan said.
To all Sentry users, rest assured that Sentry does not have any accounts with SVB. Also, up until now, none of our service providers have flagged any issues that would interfere with our services to you. Sending our best to all our customers and the wider tech community today 🤞
— Sentry (@getsentry) March 11, 2023
Silicon Valley Bank did not respond to a request for comment. The Federal Deposit Insurance Corporation, which acquired the bank on Friday, said Silicon Valley Bank had total assets of about $209 billion and total deposits of about $175.4 billion at the end of December, but it’s unclear how much the bank has on their balance sheet now.
Depositors could withdraw up to $250,000 Monday, the FDIC said. A hotline number has been provided for those who deposited more to call.
The collapse of Silicon Valley Bank adds to a challenging time for tech companies after months of stock prices falling and tens of thousands of layoffs. After years of rapid growth, things have slowed and become more unstable – an apparent disconnect from the broader US economy.
The sudden collapse of one of the industry’s most important institutions is fueling fears that the sector’s economic health may be worse than anticipated, and has tech leaders grappling with the fallout of losing a key chunk of the financial assets the industry relies on.
“There are a number of companies that can’t do payroll because their money is locked up with SVB,” said Brad Hargreaves, co-founder of the Coding Boot Camp General Assembly and a member of several start-up boards. “I think there will be layoffs.”
Founded in 1983, Silicon Valley Bank has served the technology industry through the ups and downs of the past four decades. During the start-up boom that followed the 2008 financial crisis, the bank grew rapidly, using its reputation to cater to the needs of fast-growing, ambitious start-ups. Companies that raised money from venture capitalists deposited it with the bank. Venture capitalists themselves also banked with the company, borrowing money to fund investments in new start-ups. And technicians and executives used the bank for their personal wealth management and to finance mortgages.
“They see themselves as a collaborative lender to the entire ecosystem,” Hargreaves said. “The best analogy would be almost a credit union in a small town, except it’s much larger and imagines the small town is technology.”
The bank required some customers to work exclusively with it to access credit, further centralizing its role within the tech ecosystem. One founder, who spoke on condition of anonymity to maintain his relationship with the bank, said he previously split his money across several banks until a deal with Silicon Valley Bank forced his company to put all of its money there.
Fears that the bank’s collapse could spill over to other companies and the broader economy echoed on Wall Street and in Washington on Friday. Treasury Secretary Janet L. Yellen said she was monitoring the situation, and Cecilia Rouse, chair of the White House Economic Advisory Council, said the bank stress tests conducted after the 2008 crisis meant the financial system was primed to deal with “these species to withstand shocks.”
Shares of other regional banks fell, including First Republic Bank, which also serves the Bay Area and caters to startups and wealthy tech workers.
A Bay Area start-up founder concerned about the impact of Silicon Valley Bank went to First Republic Bank on Friday to wire his money to Chase, a much larger firm, in a rush he feared to overcome deposits. The founder, who spoke on condition of anonymity so as not to jeopardize his relationship with the bank, attempted to visit a more obscure Oakland location but said there was still a line of customers outside the door requesting cables.
“I just raised a bunch of money and I can’t believe it could just fizzle out,” he said in a text message sent from a bank conference room awaiting the transfer to be processed. Some of his friends who are startup founders and bank accounts at Silicon Valley Bank “believe they lost everything but $250,000,” he wrote. His transfer eventually went through before the cutoff.
As Silicon Valley Bank served startups and wealthy individuals, the majority of its deposits were above the state-insured $250,000, raising the prospect that billions of dollars worth of funds may go unrecovered. In the past, the government has paid out sums in excess of $250,000, but it’s unclear if that will be the case here.
On Friday, Rep. Matt Gaetz (R-Fla.) said he opposed a “taxpayer bailout” by the bank.
The potential financial toll became clear on Friday as listed companies were forced to warn investors about the risk.
Roblox told investors that about $150 million of its $3 billion in cash has been deposited with Silicon Valley Bank. Roku said $487 million of its $1.9 billion in cash was held by the bank. Medical device maker iRhythm Technologies said in a filing that $54.5 million of its $213 million in cash and short-term investments was there.
Other companies said they were facing serious consequences without disclosing details. Pharmaceutical company Axsome Therapeutics said it had “substantial” cash deposits with Silicon Valley Bank and one other bank, but believed the second bank’s account and an existing loan would be sufficient to sustain funding operations. National toy chain Camp on Friday urged customers to shop from its online collection of stuffed animals, art supplies and toy cars at 40% off during a special “BANKRUN sale.”
A San Francisco-based entrepreneur said he withdrew $250,000 after investors urged him to withdraw at least some money on Thursday, but attempts to transfer the rest of the money failed. The company has now frozen $2 million in funds.
With about 90 percent of his company’s reserves frozen, he faces bankruptcy within weeks. But he knew other startups whose cash and lines of credit were now frozen and could fail much sooner.
“That’s my bigger fear right now,” said the start-up founder, who spoke on condition of anonymity about concerns about the company’s financial disclosures. “I really hope that investors can save us.”
“Everyone I know has their money with SVB,” he added.
Many startup CEOs don’t know how to pay their employees and run their businesses.
Parker Conrad, CEO of payroll company Rippling, tweeted Friday that the company was moving its settlement bank to JPMorgan Chase and would start receiving money to employees no later than Monday. He apologized to employees who were not paid on time.
“They rely on us and we haven’t delivered. While payroll is ongoing, I know delays of any length have real repercussions, especially for anyone living paycheck to paycheck,” he wrote.
Meshkin, the health tech startup’s CEO, said ahead of Rippling’s latest update that the company will have to find a way to manually pay its more than 1,000 employees in the United States if the funds don’t make it to workers early next week States and Canada, for which they currently have no infrastructure.
“We have a lot of disgruntled employees,” Meshkin said.
Shondra Washington, who works part-time as the chief financial officer at several companies, said one of her clients was working with Rippling and was waiting for payroll. Other customers used Silicon Valley Bank for their own funds and cannot access their accounts at all.
“We don’t even know where the money is. It’s somewhere in the ether,” she said. “We don’t really know where it is or when it’s coming.”
They try to transfer their money to other banks but cannot access it. Some of their customers have not been able to pay sellers. “We’re panicking,” she said.
Michael Coren, Aaron Gregg, Lisa Bonos, Naomi Nix, and Joseph Menn contributed to this report.
