Stefan Kalb was in the middle of a meeting around 1 p.m. Thursday when a fellow company executive sent him a panicked message on Slack: “Do you know what’s going on at SVB?”
Kalb, CEO and co-founder of Seattle-based food management startup Shelf Engine, had been following news of a bank run at Silicon Valley Bank, with masses trying to withdraw $42 billion from the bank only on Thursday, fearing it was on the brink.
The bank was on solid financial footing on Wednesday. The next day he was underwater.
For Shelf Engine, a 40-person startup founded in 2015 that uses artificial intelligence to help grocery stores reduce food waste, that was a big deal.
Not only did Silicon Valley Bank help the company process checks and payments, but all of the startup’s money was locked away in the bank.
Kalb swung into action. He and his team soon opened an account at JPMorgan Chase and attempted to transfer every last penny from Silicon Valley Bank.
“Unfortunately, our transfer didn’t go through and our money is still at Silicon Valley Bank,” Kalb, 37, said in an interview Friday. “We woke up this morning hoping the money would be in that JPMorgan bank account, and it wasn’t.”
Although he declined to provide the exact amount, he noted that Shelf Engine had raised over $60 million from investors. “It was a very big sum of money,” he said of the transfer.
It’s a biting state of limbo that many of the deep-rooted Silicon Valley Bank tech startups now face in the wake of the bank’s implosion, the biggest U.S. bank failure since the 2008 financial crisis.
For tech startups, which for decades have relied heavily on the Santa Clara, Calif.-based bank, it’s sparked a crisis that could lead to mass layoffs or the collapse of hundreds of startups, according to insiders at the industry.
“If the government doesn’t step in, I think a whole generation of startups will be wiped off the planet,” Garry Tan, president and CEO of startup incubator Y Combinator, said in an interview.
An “existential risk” for innovation and competition in America
Founded on a game of poker in 1983, Silicon Valley Bank has become the go-to lender for tech startups that seemed too risky in the eyes of more traditional big banks. Eventually, Silicon Valley Bank would come to do business with nearly half of all US tech startups backed by venture capitalists.
“If you’re a high-growth startup, you can’t get a credit card from a normal credit card provider, you can’t get a loan from a big bank, but Silicon Valley Bank will get you would grant that,” says Shelf Engine. Kalb said. “These are the services that startups couldn’t get elsewhere.”
Silicon Valley Bank has done business with well-known tech companies, including Shopify, Pinterest, Fitbit, and thousands of lesser-known startups, in addition to established venture capitalists, like Andreessen Horowitz.
Roku, the TV streaming provider, was among the companies caught in the middle to the tune of $487 million, it said in a regulator filing on Friday. “At this time, the company does not know to what extent it will be able to recover its cash on deposit with SVB,” Roku officials wrote of what is about 26% of the company’s cash.
Tan, with Y Combinator, which has helped launch startups like Airbnb, Reddit and Instacart, said the biggest threat right now isn’t to the world’s Rokus, but rather to the scrappy startups that were already struggling to stay alive in a difficult fundraising environment. .
The founders have been texting him nonstop since the failure of Silicon Valley Bank with a sense of dread and fear – and are increasingly faced with what could be the end of their businesses.
“The founders are texting me now and saying they don’t know how to do payroll next week. Will they have to take out personal loans to run the business? Do they have to lay off workers?” said Tan. “This may be an existential risk to competition and innovation in the US economy for the next decade.”
While most banking experts don’t expect the fallout from the Silicon Valley Bank collapse to spread to other parts of the financial world, how much money depositors will be able to recoup remains an open question.
Silicon Valley Bank’s failure comes in ‘difficult’ times for startups
The Federal Deposit Insurance Corporation said depositors will be able to access up to $250,000 of their funds by Monday morning. Any amount over this will result in a “Certificate of Receivership”.
And when the FDIC sells Silicon Valley Bank’s assets, those with certificates will receive payments — but how long that will take and how much money will be refunded remains unclear.
Some estimates suggest that about 3% of the bank’s deposits are below $250,000, meaning the vast majority of depositors have money that exceeds standard federal insurance.
Kalb said he was exploring debt financing or other lines of credit to survive.
Getting $250,000 from the FDIC would allow the startup to stay open for several more days, but not much longer.
He just paid his employees this week and his next payroll deadline is March 20.
“If we don’t have access to capital by then, we’re going to have to make some very tough decisions,” he said.
The collapse of one of Silicon Valley’s leading financial institutions couldn’t have come at the worst time for the startup ecosystem, Y Combinator’s Tan said.
High interest rates and market uncertainty have prompted lenders to tighten the money spigot, after many years of low interest rates and easy money driving up valuations.
Lately, entrepreneurs have sounded the alarm over the rapid evaporation of existing cash, forcing thousands of startups to lay off workers or shut down altogether.
With these deadly conditions comes the collapse of Silicon Valley Bank, considered a financial pillar of the startup world.
“Venture funding was already in contraction mode,” Tan said. “So it really is a difficult time for something so devastating to happen.”