What the collapse of Silicon Valley Bank means for cyber and the  tech startup ecosystem.
N2K logoMar 15, 2023

Friday’s highly-documented crash of Silicon Valley Bank may spell doom for startups reliant on the bank for funding, as well as the greater cyber and tech economies as a whole.

What the collapse of Silicon Valley Bank means for cyber and the tech startup ecosystem.

Friday saw the closure of Silicon Valley Bank (SVB) by the US Federal Deposit Insurance Commission (FDIC). The CyberWire over the weekend summarized the events surrounding the collapse. After a bank run by depositors that drove SVB into insolvency, the FDIC has placed the bank in receivership and is working to find buyers. This significant institution’s failure is anticipated to cause blowback for big tech, particularly for the startup ecosystem that surrounds it. And that includes the cybersecurity sector as well.

Moving forward financially may prove difficult for many startups and venture capital firms.

BankInfoSecurity reported Friday that what is being called the “second-largest bank failure in US history“ is anticipated to cause future troubles for startups in financing. SVB was, by assets, the 16th largest bank in the United States at the end of last year, though it has been said by AllegisCyber Capital founder and managing director, Bob Ackerman, to be the “most important to the US economy from a strategic perspective,” the outlet reports, because of its important role in the startup ecosystem. Ackerman believes some fault may lie within the depositors, saying their lack of faith and rush to pull money from the bank created this issue. "This is a self-inflicted gunshot wound. This is various elements of the venture community killing their best friend. This is people panicking. People that told the bank to trust them turned around and frankly stabbed the bank in the back when there was absolutely no need or no reason. They created this problem.” Ackerman also anticipates that younger startups will be bearing much of the brunt of the loss of the Silicon Valley Bank, as they were a leading source of funding for many early-stage tech startups, Dark Reading reported Monday.

Small bank shares, such as Western Alliance Bancorp and First Republic Bank, also dropped nearly 75pc and 67pc respectively as the day began Monday, the Telegraph reported late the same night. Major US banks such as Wells Fargo, Bank of America, Citigroup, and JP Morgan saw decreases in their bank shares as the market opened at the start of the week.

The Information Monday afternoon cited Chris Herndon, founder of travel startup The Guild, who said the bank’s collapse could mean the loss of a critical source of funding for early-stage firms. “It’ll be a lot harder to get a venture loan,” said Herndon, who chose SVB to fund his startup five years ago over JP Morgan. “I don’t know if the other guys can come in and pick up the slack.”

Impacts already observed by the bank’s crash on the cyber and big tech economies.

Bloomberg explained Thursday before the bank’s closure that it did business with “almost half of all US venture capital-backed startups, and 44% of US venture-backed technology and health-care companies that went public last year.” TechCrunch shared Friday afternoon that Polymath Robotics co-founder and chief executive, Stefan Seltz-Axmacher, preemptively transferred about half of his company’s funds out of SVB on Wednesday evening, saying “I saw that [article] it was like I don’t know if I’m freaking out or not, but it’s not worth the risk,” he said. “I was thinking you know, this is probably going to be something where everyone makes fun of me for being an early panicky person. And that’s fine because there’s no upside to not being an early person to worry that I won’t get 3.5% on some of our money for two weeks, if I’m wrong.” By mid-Thursday he had successfully removed about 25% more of the company’s remaining funds. As of the writing of the article, an attempt early Friday by Seltz-Axmacher to remove the last of the funds held within the bank (which TechCrunch notes was over the $250,000 guaranteed to be insured by the FDIC) was still pending.

Crunchbase detailed Friday the unknowns facing venture capital firms and portfolio companies following the collapse. The outlet cites Ryan Bloomer, founder and managing partner at investment firm K50 Ventures, who noted that some portfolio companies have already expressed worry around financing expenses outside of payroll for their companies.

The Information reported Monday afternoon that approximately 1,000 firms, from venture firms such as Sequoia Capital to crypto investors, had seen SVB’s involvement in their capital. This mass of firms is now going to have to find new banks to provide loans and lines of credit for their endeavors, which may likely prove difficult given the distinctive needs of firms that used SVB.

The federal government’s role in both creating and solving SVB’s collapse.

Business Insider explained Saturday that the pressure caused by sudden hikes in interest rates on the economy could lead to instability in institutions thought to be immune, or at least somewhat stable against the tumultuous economy. "When you raise interest rates quickly, after 15 years of overstimulating the economy with near-zero rates, to not imagine that there's not leverage in every pocket of society that will be stressed is a naive imagining," said Lundy Wright, partner at Weiss Multi-Strategy Advisers, to Phil Rosen of Insider on Friday. Inflated interest rates have also been affecting the cryptocurrency market, the outlet reports, which made Bitcoin’s stock nosedive over 65%.

The federal government did, however, work quickly to attempt to prevent a further domino effect Sunday, the AP reported, guaranteeing the insurance of all deposits “above and beyond the limit on insured deposits of $250,000.” This backstop for the impacted startups allows for companies to, well, survive. Due to the nature of Silicon Valley Bank’s client base of startup customers and venture capitalists, insurance of only up to $250,000 would not have allowed for payroll and necessary bills to be paid for many affected organizations. The outlet shares that this government decision is intended to stop and prevent further bank runs, and generally settle the nerves of the bank’s former customers. An emergency lending program was also enacted by the Federal Reserve Sunday, which AP News reports allows banks to “borrow money straight from the Fed in order to cover any potential rush of customer withdrawals without being forced into the type of money-losing bond sales that would threaten their financial stability.” The hope is that the lending program does not actually need to be utilized to a great degree, rather, it allows for reassurance that the government is behind the impacted startups. President Biden called for a “full accounting” of the buildup to SVB’s shutdown, NBC News reported Monday, and intends to hold those involved accountable. “In my administration, no one is above the law. And finally, I must reduce the risk of this happening again,” the President said. “Americans can rest assured that our banking system is safe. Your deposits are safe. Let me also assure you we will not stop at this — we’ll do whatever is needed.”