Companies struggle to pay salaries and pay bills after SVB’s precipitous collapse

  • Tech companies that held deposits in SVB are wondering when they will be able to pay employees and their accounts after the bank collapses.
  • The FDIC was appointed liquidator of Silicon Valley Bank on Friday after the bank was closed by California regulators.
  • “Question number one: how will you get paid in the next couple of days?” said Ryan Gilbert, founder of venture capital firm Launchpad Capital.

The sudden collapse of Silicon Valley Bank has left thousands of tech startups wondering what is now happening to their millions of dollars in deposits, money market investments and outstanding loans.

Most importantly, they are trying to figure out how to pay their employees.

“Question number one is how will you get paid in the next couple of days,” said Ryan Gilbert, founder of venture capital firm Launchpad Capital. “No one has an answer.”

SVB, a 40-year-old bank known for handling deposits and loans for thousands of tech start-ups in Silicon Valley and beyond, collapsed this week and was closed by regulators in the biggest bank failure since the financial crisis. The demise began late Wednesday night when SVB said it was selling $21 billion in securities at a loss and trying to raise money. By Thursday evening, it had escalated into an all-out panic, with stocks down 60% and tech executives rushing to withdraw their funds.

While bank failures are not uncommon, SVB is a unique beast. It was the 16th largest bank by assets at the end of 2022, with $209 billion in assets and over $175 billion in deposits, according to the Federal Reserve.

However, unlike the typical conventional bank—Chase, Bank of America, or Wells Fargo—SVB is designed to serve businesses, with more than half of its loans going to VCs and private equity firms, and 9% to early stage and growth stage companies. . . Clients who approach SVB for loans also tend to keep their deposits at the bank.

The Federal Deposit Insurance Corporation, which is the beneficiary of the SVB, insures $250,000 of deposits per customer. Since SVB caters primarily to businesses, these restrictions do not matter much. As of December, approximately 95% of SVB deposits were uninsured, according to filings with the SEC.

The FDIC said in a press release that insured savers will have access to their money by Monday morning.

But the process is far more confusing for uninsured savers. Within a week, they will receive a dividend covering an unspecified amount of their money and “certificate of receipt of the remaining amount of their uninsured funds.”

“Because the FDIC is selling the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors,” the regulator said. Typically, the FDIC transfers assets and liabilities into the hands of another bank, but in this case it created a separate institution, the Santa Clara National Deposit Insurance Bank (DINB), to take care of insured deposits.

Customers with uninsured funds – over $250,000 – don’t know what to do. Gilbert said he advises portfolio companies on a one-to-one basis rather than sending out bulk emails because every situation is different. He said that everyone’s concern was that wages be paid by March 15th.

Gilbert is also a limited partner in over 50 venture capital funds. On Thursday, he received several messages from firms about capital requirements or the money that fund investors send as transactions are made.

“I received emails saying money is not being sent to SVB and if you let us know,” Gilbert said.

Payroll issues are more complex than just accessing frozen funds because many of these services are handled by third parties that have worked with SVB.

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

“You need to notify your bank immediately of important changes to the way you debit your Rippling account,” the memo reads. “If you do not make this update, your payments, including payroll, will not be honored.”

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

“Our top priority is to get paid to our clients’ employees as soon as possible, and we are hard at work on this through all available channels and trying to understand what the FDIC takeover means for today’s payments,” Conrad wrote.

One of the founders, who asked not to be named, told CNBC that everyone is scrambling. He said he spoke to more than 30 other founders and also spoke to the CFO of a billion-dollar startup that was trying to move more than $45 million out of SVB to no avail. Another company with 250 employees told him that SVB had “all our money.”

An SVB spokesman pointed out the FDIC statement to CNBC when asked for comment.

“Significant risk of infection”

According to Mark Williams, professor of finance at Boston University, the FDIC’s immediate goal is to quell concerns about systemic risk to the banking system. Williams is intimately familiar with the subject, as well as with the history of the SVB. Previously, he worked as a banking regulator in San Francisco.

Williams said the FDIC has always tried to work quickly and keep depositors safe, even if the money isn’t insured. And, according to SVB’s audited financial records, the bank has cash — its assets are greater than its liabilities — so there’s no obvious reason why customers can’t get the most of their funds, he said.

“Banking regulators understand that if swift action is not taken to restore the health of uninsured SVB depositors, this will lead to a significant risk of contagion in the banking system as a whole,” Williams said.

Minister of Finance Janet Yellen met with leaders of the Federal Reserve, FDIC, and the Comptroller’s Office on Friday about the collapse of the SVB. The Treasury Department said in a report that Yellen “expressed her full confidence that banking regulators would take appropriate action and noted that the banking system remains resilient and regulators have effective tools in place to respond to these types of events.”

On the ground in Silicon Valley, the process has been far from smooth. Some executives told CNBC that by sending their bank transfer early Thursday morning, they were able to successfully transfer their money. Others who took action later in the day are still waiting – millions of dollars in some cases – and unsure if they can meet their short-term commitments.

Whether or not they can get back to work, and if so, how quickly, companies will change how they treat their banking partners, said Matt Brezina, a partner at Ford Street Ventures and an investor in startup bank Mercury.

After payroll, Brezina said the biggest challenge his companies face is accessing their debt, especially for those in fintech and labor markets.

“As a result of this, companies end up diversifying their bank accounts significantly,” Brezina said. “Now this is causing a lot of pain and headache for many founders. And it will also hit their employees and customers.”

The rapid collapse of the SVB could also serve as a wake-up call for regulators when it comes to dealing with banks that are highly concentrated in a particular industry, Williams said. He said that SVB has always been too tech-savvy, although it managed to survive the dot-com crash and the financial crisis.

In its mid-quarter report, which began a downward spiral on Wednesday, SVB said it was selling at a loss and raising capital because startup clients continue to burn money fast despite the ongoing downturn in fundraising. This meant that SVB struggled to maintain the required level of deposits.

Instead of sticking to the SVB, startups found the news bad and decided to rush to the exit, and the crowd gained momentum as VCs instructed portfolio companies to get their money out. Williams said the risk profile of SVB has always been a concern.

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

SVB was launched in 1983 and, according to its written history, was conceived by co-founders Bill Biggerstaff and Robert Medearis while playing poker. Williams said the story is as relevant now as ever.

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

— CNBC’s Laura Kolodny, Ashley Kaput and Rohan Goswami contributed to this report.

LOOK: SVB implications could mean fewer loans available

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