Tech startups and investors fled after the collapse of Silicon Valley Bank

(CNN) The sudden collapse of a top Silicon Valley lender has prompted tech investors and startups to scramble to figure out their financial burden and the impact on their ability to operate, at a time when many companies are already through far widespread layoffs and less tight access to capital in an uncertain economy,

California regulators on Friday shut down Silicon Valley Bank, putting it under the control of the US Federal Deposit Insurance Corporation. The FDIC acts as the receiver, which usually means liquidating the bank’s assets to repay its customers, including depositors and creditors.

The move ended in a staggering 48 hours, during which uncertainty over the prominent tech lender’s liquidity prompted some startups to weigh withdrawing funds and also sparked fears of contagion risk to the broader financial industry.

After the bank collapsed on Friday, uncertainty in the startup community only grew.

“Now that the bank is broke, I just want to know what happens next,” Ashley Tyrner, founder of health food supplier FarmboxRx, told CNN in an email. “The FDIC covers 250,000, but will I get my entire eight-digit number back?”

Parker Conrad, the CEO and co-founder of HR platform Rippling, said Friday that his company has learned that some customers’ payslips have been delayed due to the bank’s “solvency problems”.

“Our top priority is getting our clients’ employees paid as quickly as possible and we’re diligently working on it through every available channel trying to understand what the FDIC acquisition means for payments today,” he wrote on Twitter.

Arjun Sethi, an investor at Tribe, tweeted on Friday that “VCs are emailing right now to disclose SVB involvement.” Meanwhile, Sam Altman, the CEO of OpenAi and former president of startup accelerator Y Combinator, said investors should consider “offering emergency money to your startups that need it for payroll or whatever.”

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He added: “No documents, no strings attached, just send money.”

“mass hysteria”

According to media reports and public contributions from venture capitalists, even before the collapse, a number of startups were considering withdrawing their money from the bank.

Founders Fund, an influential venture capital firm founded by billionaire Peter Thiel, reportedly advised its portfolio companies to withdraw money from the bank. (A Founders Fund representative declined CNN’s request for comment). Tribe Capital, meanwhile, urged companies to be mindful of where they keep their money and how they raise funds.

“Any bank with a business model is dead if everyone moves,” Sethi wrote in a memo to the founders, which he shared on Twitter. “Since the risk is not zero and the cost, it is better to diversify your risk, if not all.”

Sethi urged the founders “to keep their assets in the most liquid traditional banks and not to take unnecessary risks”. He also recommended that the founders “call every debt line, close all primary rounds, do it now and be ready to make concessions.”

But by the time Tyrner’s company tried to withdraw money, it was too late, she said.

“The entire SVB system was down,” she told CNN. “We couldn’t log into our accounts, couldn’t contact anyone, their hotline rang on a ‘disconnected’ message or just hung up… none of our account representatives responded to calls or emails.”

Other prominent venture capitalists had apparently called for calm so as not to stir up panic. Mark Suster, a partner at venture capital firm Upfront Ventures, urged the VC community to “come out publicly to quell the panic” surrounding Silicon Valley Bank, saying in a lengthy Twitter thread that “classic ‘runs on the Bank’ us harm whole system.”

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He urged people to remain calm but added: “I know some have already withdrawn money. I know some advise it. I know it’s scary… What matters is that we don’t have or cause mass hysteria.”

Villi Iltchev, a partner at Two Sigma Ventures, similarly said his colleagues should “support” the bank. “SVB is the number one financier for tech startups and the biggest supporter of the community,” he said in a tweet. “Now is the time to support them.”

Additional challenges in the startup market

The rapidly unfolding fallout at Silicon Valley Bank comes at a challenging time for the tech industry. Rising interest rates have eroded the easy access to capital that has helped fuel soaring startup valuations and fund ambitious, money-losing projects. Venture capital funding in the United States fell 37% in 2022 from a year earlier, according to data released by CBInsights in January.

At the same time, broader macroeconomic uncertainty and recession fears have prompted some advertisers and consumers to rein in spending, hurting industry revenue drivers. As a result, the once-high-flying tech world has entered a steep cost-cutting season marked by mass layoffs and a renewed focus on “efficiency.”

Things may have gotten worse at Silicon Valley Bank as more startups feel squeezed for cash and need to withdraw funds. Now the bank’s collapse risks exacerbating the industry’s liquidity crisis and further turmoil.

In his post, in which he suggested a bailout might be needed, Ackman said a Silicon Valley bank “default” could “destroy a key long-term engine of the economy as VC-backed companies rely on SVB to get loans.” maintain and hold their assets”.

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Ackman compared SVB’s situation to Bear Stearns, the first bank to fail at the start of the 2007-2008 global financial crisis. But this time, trouble is brewing in Silicon Valley’s backyard.

– CNN’s Allison Morrow contributed to this report.